Surveillance: Fed's Relaxed Approach With Darda

gotta find that are absolutely brilliant. Christopher Harvey with Wells Fargo, You absolutely nail the under ownership of Apple computer explained to our audience on radio and TV. How is it possible Apple is under owned? That's a great question. It's something we've been monitoring for about two years now and we've been scratched our head. Y pms really have been

underweight Apple, or institutional pms have been underweight Apple. We'd walk into an office, we talked about the underweight a PM, whether it was a growth or CORPIM would say I don't care, and we'd say, but you should, and they would just say, I don't care. Apples not a grocer stock, not my portfolio. Let's move on. And now a lot of people are scratching their heads saying, how did Apple get to where it is at this point in time? And that's one of the reasons why we think it

continues to grind higher. What is the behavior of active managers as they end a quarter end, whether it's September thirty or twelve thirty one twenty, are they is this the correct word? Are they forced to buy these high flying texts? Well, I don't know if they're forced, but you do see what where you do hear a lot of the risk pms. It's not risk pms, but risk managers knock getting on the door and saying, he told me two months ago, you told me three months ago

you were going to tighten this up. You told me that Apple was gonna pull back. It hasn't. We need to do something now. And the other thing is you have cash laying on balance sheet, Well, you have castling around in the portfolio. You have to start equitizing that because what's happening is relative performance is beginning to decay and has been a pretty good year for a lot of the managers, so they want to keep that from happening. There's a conflation going on between under ownership of Apple

and undershown ownership more broadly of US stocks. Can we make that conflation. Can we say that the reluctance to own more Apple shows the reluctance to have a heavier overweight in U S stocks. Well, there's a couple of things going on right now. So I think what's one of the things that's happening is we're seeing this move to passive right so, people are starting to get more Apple into their portfolio. They're just doing it in a

different way. The PMS two to be or forced, but but the asset owners aren't waiting around for them to make that move. The other thing to you, to your point is we've seen this rally. We've talked about a summertime melted up of ten ten percent plus. We're there and people have been brought kicking and screaming to this thing. And now as we look at this thing, we're not saying, Okay, it's time to get off, it's time to leave the party just yet. We think a lot of the good

news is priced in. But this is a time where people get squeezed in. This is time where funny things do happen. I'm really confused, Chris, we were talking three weeks ago, four weeks ago with economist after economist after stock trader who said, if we don't get a second round of fiscal support, we will see stock prices go down. They are at new record highs. Why is this happening? Well, I think that's whether economists and not profolio managers are

a Greek strategies. The second thing that we're seeing, what we've been saying is the reason for the run up is things are getting less bad and they continue to get less bad. Anecdote, When I drive around, there are more people on the road, When I walk around, there are more people in restaurants. So the economy is slowly

grinding higher. You still have basically zero percent interest rates, you have credit spreasident tightened dramatically, you have funding widely available, and you're saying it still having pretty good reports from many many companies. So I think that's really what's what's going on, and the leaf is that ultimately something will get done. Chris, I want to pin you down on a percent move up in SPX. Michael Purvis is modeling under seven percent lift in sp X. How do you

feel wells fargo. Can you quantify single digit or dare I say double digit up for the market. So our price target, so we've been one of the more aggressive people off the bottom. We've had one of the higher price targets, but we're actually through our price target at this point in time. Our price target is um. But when we got there, we didn't say, Okay, okay, we're right, the markets wrong, the market is gonna fall apart. What we said is there's plenty of reasons for this market

market to continue. Now, what we're saying is we're looking less about market direction and more about constituents in the portfolio. What you want to own that you want to rotate, and our thought is you want to move down smaller cab You want to look for companies that have COVID beta, that have better comps in fourth quarter of next year, excuse me, the first quarter of next year and second

quarter of next year. In addition to that, you want more economic sensitivity, because we do think economy will continue to grind hire Well, we welcome all of you this morning on Bloomberg Radio, on Bloomberg Television, particularly across serious x M. In the path of Hurricane Laura Right now Benee Shreveport, Louisiana will go up into the right if you will, and we said good morning to all of

you preparing for Hurricane Laura, Lisa. What I find so interesting about the Thursday is the event structure is so predictable to the President's speech tonight, and yet we really don't know what the various outcomes of the various events of Thursday will be. Yeah, and you're not going to be chased by a bear in Jackson Hole. We do know that, which I think probably is somewhat of relief for you, But very much the focus is going to

be on J. Powell and Chris. I'm wondering, from an equity perspective, is there out perhaps outsized risk that we could see equity response that is more than any response we can see in bonds to something that J Powell says. There's always that possibility that there's always that opportunity where things when when we got the minutes a couple of weeks ago, it wasn't wasn't as uber dubbish as a lot of people thought, and for a hot minute we

pulled back. I don't know Jeal is going to talk about inflation, but we've been talking about inflation for the last ten years. An issue that I have is we fled in the market with liquidity in the United States globally, It's real. It was really hard to go belly up or to go bankrupt. Too much capacity, and that's one of the reasons why we're talking about the lack of inflation is a creative, destructive process never reaches a natural head. We're doing it again. But I just I hear a

lot of things about inflation. I'll believe it when I see it. Christopher Harvey, thank you so much. With Wells Fargo, Salesforce dot Com entering the down, Alicia Levin joined. She's the b n y mel and we're thrilled she could be with us today. Alicia, the last time we spoke, I believe you had a more conservative tax, a more caution to the equity markets. Do you sustain that? So,

Hi didn't morning. Nice to see you guys again. I mean, look, I think that the pace at which we're rising is a little bit concerning for future games from here, But overall, there's so much support in the market, not just from the FED but also the flows yer today where five to one flows have been going into the bond market and not equities. And also the fact that's nearly five trillion dollars on the sidelines sitting in cash, and so all this suggests they're still dried outer even even with

the pace at which we've moved higher. So yes, I'm cautious. We're just going into that season, that seasonal sort of weakness, that September October where you know, gains tend to be consolidated. There'll be some election anks, I'm sure, and and there'll be some COVID anks on the vaccino treatment front. It's never a straight line. But yeah, it feels like, you know, we could pause, but ultimately I'm still positive the direction of travel is upward. Which ratio is your key valuation

metric right now? Is it priced to sales? Are we rationalizing like Amazon? Or is it price to cash flow? Is it something like across to the balance sheet total enterprise value to IBADA, which is the ratio that matters to Alicia Levine. So I say, that's a great, great question. You know, I've been talking to people, been in the market for forty fifty years. In the last few days, no one's actually seen anything like this. Um it's kind of extraordinary, I'd say, right now, it's really cash um.

Cash is king, and you know, the ability to plow back into the business, and you know clearly. I mean, I'll just give you a metric. Every night, we calculate the out performance of the five large caps tech Sock versus the rest of the SMP. We started this in April. The out performance was twenty eight percent in the middle

of April. Do you know as at the market closed yesterday, the out performance of those five stocks is now sixty six so percent over the rest of the S and P. And the reason is the cash generation, the earning power, the cash generation. They all need debt and they keep on growing and it's not entirely irrational. It's not irrational. They are growing and I are growing faster well, and they are growing and it isn't irrational. So if you

want to get cautious, what do you sell? That's great. Look, I think that for the most part, given how how levered the market is to the to the to the tech sector and the communication sector right now, you have to have some exposure here. I think I think the general idea of trimming some of your winners and rebalancing

is a great idea. We do believe that there will be a credible vaccine out there somewhere in the next four to six months, which will blunt some of the macro concerns that you've talked about in the previous segment. There will be something available, I'll pretty sure by the first quarter of one and so therefore your industrial after housing stocks and even your epicenter stock could look appealing

in that scenario. Alicia, I'm struggling though, with the idea of the Robin Hood narrative, the idea that yes, you've got the fanmag stocks that have some understandability behind their rise, Tesla gaining four hundred and fifteen percent, are their pockets of froth here? Well? For sure? For sure. I mean there are certain names you can't explain and um, and I think that's that's one of them. Um, you know,

there is a momentum going. I mean, let's for Tesla just for one second was the largest short in the market, and it was the largest short nut on me. Not only on the institutional side, you're also on the retail side. The part of that price action it was that technical there, but clearly, you know, we joked about this last time. Do not make great technical charts, and there'll be a day, but it can go on longer. Okay, folks, what you

gotta understand here's Alicia Levina is prodigious in math. So we're gonna do math Thursday here in this long hour. What do I mean by a long hour? We start out at eight am Wall Street time, and we're really going to which is a speech of Chairman Pal. We've got some special coverage on that will tell you about here in a moment, Alicia, Come on, Alicia, you're going all squared on me here with the parabola. And that comes back to Gamma or convexity, the best that's on there.

Is there a market overweight right now? I mean, everybody's telling me there's money on the sidelines, but is there room there for Gamma for acceleration. There's there's room for other sectors to move and not have text destroyed because you don't have to sell tet to buy the other sector, right because there's cash. You've got five trillion dollars of cash on the sidelines, and so much money has gone into the bond market and it'll be very Let's bring in J. Powell. You know this is a big story

for the morning. You know, what are we going to here today? And they're going to sit on race even as we see inflation moving upwards. Alicia, You've done a great job answering at Tom's gratuitous way of getting gamma in there. Really, Tom, seriously, she's not even focusing on the technical Come on, Alicia Rudder Shelton Nateenberg. I mentioned Sheldon Nateberg Folk yesterday. I got a huge response to

that from geeks on Wall Street. Mr Nadenberg came out of Chicago years ago with the definitive one volume on the Greek letters. It's read like the Old Testament Wall Street as well. Alicia, where where's the Greek letters here right now? I mean, there's a whole bunch of Greek letters. Which of those matters to a Lalisha? Alicia Levine. So what matters to me right now is is the positive

rate of change? Right so the second derivative, That's what matters to me right now, and that's what matters to markets, and we forget that at our peril. It's never the absolute level. It is the rate of change. And every time investors forget that they're on the wrong side of the trade. And the reason the markets moving upward it is because the rate of change continues to be positive. Here in the US. The data has been getting better

in the last few weeks. It is coinciding with COVID cases essentially rolling over on that bell curve, very similar to what we saw in April. Will they say, they're hard to say, but the data have gotten better and the positive surprises have been there, and that is why the market can continue to move higher. It's the rate of change Newtonian mechanics with Alicia Levina doesn't get better than that with b n Y Melon. They're back at the n Y MEL and the General Council is going

what did she say, Alicia Levine? Where this is moarting? Thank you right now we're stut to bring you Megan Green. She's at Harvard Kennedy School and Senior Fellow, and it's just done brilliant work folding market economics and acute analysis into the broader theory of what we're doing in economics and of course how it links into finance and investment as well. Megan Green, thank you so much for joining

us today. Megan, I really want to go to the arch issue which has been the battle of our textbooks, rules and discretion and this new, more surgical idea of targeting. Is there any proof that a central bank can target anything? Well, there's there's more and more proof that a central bank can't target much of anything. They can target the rate

that they're setting UM. But the feds dual mandate is full employment and stable of inflation of two and on the latter inflation, you know, the FEDS missed the mark for the entire past recovery. In fact, since the FED adopted a two inflation target in twelve, inflation is average

just under one and a half percent UM. So when J. Powell does get up, and it's widely expected that he'll provide the broad breast strokes of change in the Fed's target towards average inflation, so that there's a catch up factor, meaning that the FED will overshoot on inflation that offset undershooting for so long. I do think investors might ask, you know, can the FED overshoot inflation? It's been so

far under its target for so long. There's a real credibility issue, and the FED has to promise that it will overshoot on inflation in the future, which requires upfront credibility when it hasn't really built any How do you mechanically or what is the reaction process that gets you to overshoot inflation. I mean, it's a FED really wanted

to overshoot on inflation. It could provide helicopter money and achieve it, I think, but within kind of the political feasibility of what the FED can do these days, I don't think there's a whole lot that the FED can do to even hit its target, particularly now when we're facing a huge and persistent drop and demand. So I don't think the FED can generate inflation of over two

percent right now. There are concerns though, that the supply side aspect of this crisis will come through and generate some inflation, So the FED might get lucky for a little while and have inflation overshoot it's tuper sent target, but I doubt that will be sustained. Megan, we can't get good inflation unless we get more jobs back, and not all job losses are equal. Initially people were saying that they were temporary job losses. Now they're increasingly permanent.

They're increasingly high paid, and I am unclear on what the FED can do to improve this picture. Are FED actions at this point actually hurting more that they're helping because they take the pressure off Washington. Yeah, so I think you're right. The FED can't do much about the job market right now other than keep rates really low, try to run the economy hot to bring in workers, which by the way, the FED was already trying to

do during the last recovery. Um. I think it's really up to fiscal authorities to do something to try to address the labor market. So it's not up to the FED. Though. I do think that when Jay speaks later today, he will probably provide a slightly barish view on the economy so that he can keep the pressure on Congress, and I suspect he'll mention that fiscal policy is the most

important thing right now, as he has been doing. When we talk about inflation, Megan, We're getting plenty of inflation and asset prices, and I do wonder whether at a certain point it becomes harmful without some sort of fiscal backdrop, without some sort of help that actually can help the actually economy. Do you see the asset inflation is being pernicious at this point or does it have more room to run before it reaches at I think it probably has more room to run. It depends on what markets

you're talking about. Right, We've seen incredible leverage taken on during this crisis, and that will be a problem one day, But it won't be a problem as long as debt servicing costs are so incredibly low. Because raids are so low, the stock market looks frothy. I don't think anyone would doubt that. But I think that as long as the feed is stuck in, even without an average inflation target, we all know that the FED is not going to higrate anytime soon. Um. I think that that has a

bit for the run. Megan, I want to play off yard cushion or now over at the desk, start talking about the President's speech tonight, and you know, Megan, I want to talk about a hopeful AMA. Mr Kristener says the President will speak of a quote hopeful unquote America. How does J Powell do that? How does he generate a hopeful message today when I've got a number of

leading economists looking at double digit unemployment coming down slowly? Yeah, I think it will be hard to do and It's probably not really in Jay's best interests, since, as I said, he'll want to keep the pressure on Congress to come up with a fiscal stimulus, which probably won't happen until September at best at this point. Um, But you know, I think you could look to some data points like

retail sales durable goods which improved. Um. The problem is that all the kind of high frequency alternative data sources suggest that this recovery is already petering out, and I think it could could turn into a downturn if we don't end up reacting some of the fiscal stimulus. Megan Green, thank you so much, greatly appreciate it. With the County School at however, we're so fortunate here to have like Darted, jointess of Mike Darta's m CAM Partner's chief economists and

market strategist. Mike, thanks so much for joining us here. I love to get your thoughts on the comments we just heard from FED Chairman Powell. Absolutely so thanks for having me on. I think, you know, going through the whole speech, the key phraseology here and and a lot of this was widely anticipated, but Poull basically stated specifically in the speech that they're moving to a flexible form

of average inflation targeting. So basically what that means is the FED wants to shoot for a two percent inflation goal. The problem in the last cycle was that they undershot it, and there was no makeup strategy for that undershooting. So this time around, the FED wants to be focused on if they're undershooting, to you know, to make up for that with some overshooting, to you know, to a limited extent. Right.

He also said in the in his formal remarks that if inflation were to start to get going too much, that they would not hesitate to act tighten policy and to bring inforflation back down. But the basic point here is to average to an average two percent inflation over time. Uh and so two percent will not be a ceiling but really a flexible average inflation goal. Michael Darter thrilled to have you on. You're just the right guy to

have on here at this moment in FED history. What I find fascinating is the ex anti feel here to this. If they're gonna inflation target and overshoot, are they going to be reactive to the overshoot or is it implied in the speech that they will be proactive and get out front to push inflation higher. Well, I think Tom, the idea is to be you know, to be proactive here. So one of the things that happened towards the tail end of the last business cycle is that the FED

was tested. Right, had a lot of people saying, well, the Fed's going to run it hot. And we had a test in the last two years of the last icle where fiscal policy eased, inflation was mostly below the Fed's target um, and the labor market was tight. What did the Fed do? They actually tightened policy for two years even though inflation was below their target most of the time, and so the FED was basically acting the way that prior Feds acted, moving in a way to

head off any inflation above two percent. Well, it turned out that the tight labor market really didn't put any significant upward pressure on inflation, that growth was slowing, and that you know, recession risks were actually starting amount which is why the FED had to reverse course and start cutting rates that inverted yield curve. Tom told us something, you know, we discussed this many times. A lot of economists ignored it, said it was irrelevant, but it both

a slow down and eventual rate cuts. Promised not going to turn this into a historical clinic, but I'm going to go back. Michael darted to Richard Timberlake and the Georgia School. Good morning, Robert McTeer and the great one volue monetary policy in the US and intellectual and institutional history. That's great, But is all this theory overwhelmed by the dynamics of aggregate demand and that you can you can use the monetary tool kit until it doesn't respond to

aggregate demand dynamics. Well, I think that's that's exactly right, Tom. I mean, how does inflation move up and move down? And and what is the fet actually doing. You know, they have to be able to stimulate aggregate demand to get inflation to move up. They have to be able to retard inflation to move down, right, And so they

do that essentially with two different policy tools. They can buy or sell bonds to easier tighten, or they can target an interest rate of short term rate or there's some discussion now about moving to a longer term interest rates. So that's what the central Bank does, and I think that's important to reflect on now that there's a lot of discussion and pressure on the FED to add additional mandates. But I think we've got to be very careful in

not asking the FED to do too much. If it's one goal was basically not achieved in the last cycle two percent inflation. Is it really a good idea to be lopping on additional mandates that the FED is not

the tools for. And I think the answer to that is no. We need to be very careful right if we're asking, you know, if if we as a society are saying we have a pressing need to address climate change or disparities between groups, that's going to be a policy that fiscal You know that that elected icials with a fiscal policy apparatus are going to have to address monetary policy. I think, you know, we're really need to do too much if we're going to add mandate after

mandate after mandate, this is little growth in inflations. He won't even let me cut in here. Darna just goes on like that. Michael and I are just fired up, folks. This is like Bloomberg on the economy re Dux as well. Paul Sweeney in Time King with Michael Darta, we are thrilled. Michael Dartas with us with a Dow up hundred and fourteen points. Okay, I have one more geek question, and then Sweeney's going to get control of the program. Michael Darda.

The Dallas FED had that symposium for John B. Taylor of Stanford. I'm go in to guess eight years ago and it was the rules bay Lipsky spoke. Everybody weighed in here on rules. Did Jerome Powell state a new form of rule today? He did, But like I said in the opening, you know, his phraseology was a flexible

form of average inflation targeting. You know, so an inflexible approach would be to shift to a you know, explicit numerical target or something like a price level target target with a FED was you know, explicitly committed to to make up, um, do you know a precise magnitude of undershoot, order reverse and overshoot and that and that's not um

what happened today with the polic speech. All right, Mike, So, from a practical perspective, what do you expect to change for the fed as over the next several quarters, if anything, in terms of how they're viewing the rate structure and the economy Yeah, great question. So I think one change is going to be less confidence in these Phillips curve relationships. Right.

We discussed the FED tightening policy when the labor market got quite tight in the last few years of the previous expansion, and they did that because these Phillips curve models were more or less saying, Okay, labor markets tightening, and so there's less capacity out there, less less room to run, and so that will put upward pressure on inflation. It was not anticipated that we would get to fifty year low as in the unemployment rate with inflation still

below the Fed's target. So when I read the policy speech, that's what comes through loud and clear that there's going to be less focus on, you know, on on the tight labor market necessary sarily generating you know, a lot of pressure on inflation or even meaningful pressure on inflation. Chairman there variable, Chairman Paul answering questions now as they do with the the FED, and that's fine. One of the headline questions goes to the heart of the matter.

It's Walter Heller moment. Any inflation overshoot will be moderate Comma, not permanent, says who Michael Dart, Yeah, that's true. I mean, listen, um, you know we could end up fighting the last war here, and by trying to make up for lost ground on inflation, it could be that there's an overheating and arise in inflation down the road. Not a near term risk, but down the road. Um, you know that's more than Fed officials are bargaining for or anticipate aiding, and and so

that you know that is a risk. And fourth on before which would be total aggregate demand. So nominal GDP, this is a favorite metric of Tom Keane. Total spending in the economy. It was very moderate in the last cycle, averaging just four percent per annum. So if real growth potential is around two you're not going to get you know,

inflation much above two um. And so really what the Fed would need to do here would be to set a path for aggregate demand nominal GDP to to to move up in a way to run away relative to growth potential. That would get inflation to two percent. Now we're you know, we're a depressed economy because we just got hit with this shock. So aggregate demand is going to have to run much faster than the growth rate

of potential for a full recovery to take shape. But once that happens, then nominal growth will have to be adequate enough to generate at least two percent inflation and growth potential around two, maybe a little below two. That will be at least four nominal. Let's go to the reality. Michael Darta. One final question, You've been wonderful. How urgent is that the Chairman Powell get a stimulus package from the White House, from the Senate, from the House. You know,

it's a fascinating question, Tom. I mean we've been telling clients basically, you've got three variables to account for here, an unanticipated fiscal shock and unanticipated monetary shock, and then the evolution of the pandemic itself. Mike Darta's and camp Partner's cheet economists and market strategist. Thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm

on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio