Surveillance: Gauging Growth With Goldman's Hatzius

focusing on the American consumer. He's done that too, great acclaim as their chief economists and Haud of Global Economics with great, great forecasting skill, always very cautious about the dream of higher interest rates, the dream of a greater gross domestic product. Dr Hassi has joins us UH this morning. Jan,

thank you for joining Bloomberg Surveillance. You guys shook the world with a markdown yesterday and g d P. If we get stimulus from President Biden or a second term President Trump in January or February, how will you adjust? It's going to be to be with you, and you're obviously being way too kind there, but in terms of the outlook. We did take down the fourth quarter because of the reduced likelihood and very low likelihood now of a fiscal deal. We were at six percent quarter on

quarter annualized. We're now three percent quarter on quarter annualized.

In fact, a few weeks ago we had considered a larger downward revision than this in the event of no no deal between Democrats and Republicans, but we ended up with a somewhat more moderate downward revision in light of the fact that the end of the six hundred dollar per week payment to unemployed workers at the end of July doesn't seem to have had as large an impact on spending as we had we had thought, so it seems like the consumer is still holding up reasonably well.

But nevertheless, a dullwood religion was necessary. Now. If we get into two thousand and twenty one and we have another fiscal easing under a President Biden with a Senate majority, or under under President Trump, then we would we would upgrade our numbers, probably because we're not really building in a significant amount of stimulus from here. We think there are other reasons why the economy may do pretty well in two thousand and twenty one, and they related to

you know, COVID developments and and potentially a vaccine. But we're not building the stimulus at the moment, and your initial acclaim came off mortgage equity wouldraw and looking at the behavior of consumers in the housing boom of OH four, oh five and indeed into oh six as well, what is the behavior of consumers that you and Goldman Sex see right now? I think the main constraint on consumers

is really the development of the of the pandemic. I mean, that's the reason why the economy turned down so sharply in March and April. And to the extent that we can unwind um these these losses, I think it's going to reflect improvements in our ability to cope with the with the disease, to reduce infection risk, and ultimately to come up with a vaccine. That's at the at the

top of the list for me. But of course income plays an important role as well, and government government programs to shore up incomes during the worst part of the pandemic, I think we're extremely helpful for me. The most amazing statistic of this entire period has been the fact that the second quarter saw the biggest decline ever in real GDP going back at least two ninety seven, but also

the biggest increase ever in real household disposible income. That's that that was really key, I think in turning around the downturn of margin April in subsequent months. But of course this story isn't over yet, and right now we've seen seen a setback it seems like, and what happens to fiscal policy as we go into two thousand twenty one is going to be important. Well, yeah, that's the issue. And Bob Prince over a Bridgewater has taught to us

a couple of times about the duration mismatch. This pandemic will go on for a whole lot longer than the three month band aid that the fiscal authorities keep applying. And I just wanted from your perspective, we managed to offset that income crisis, that income shock of six months ago. Do you think the nature of the slowdown changes if the appetites to apply another fiscal band aid isn't there. I do. I think there is a very strong case for keeping policies both on the monetary side and on

the fiscal side, very accommodative. I'm generally lee on the more optimistic side of the debate as far as the economic outlook is concerned these days, and I do think that we're making significant headway, but at the same time, we're clearly still very far away from full employment. The pandemic is definitely not behind us, and the economy still needs a lot of support. So on the monetary side, I would say, I'm I'm pretty comforted by global central

banks willingness to continue to provide support. I think there is there's a very strong consensus there that the economy is still needed. But on the on the fiscal side, of course, it's a more political decision, and especially in a hyper politicized environment as as as as what we have currently given the impending election, it's much easier to see a setback, and clearly we have just seen a setback, and I think it would be very helpful if we

could get another round of support. What's interesting about your cold though, Yan, as you cunt growth for the end of this year, you boost growth for Q two Q four at the back end. There's some people, are there some economists who believe that if we don't grow quickly enough now, the potential growth in the future has to come down as well. What is it that you see that makes you think that even if growth has to come in in the near term, it can pick up

in the longer term, or at least the medium term. Well, I think that if you're restoring less activity in some of the sectors that have been hardest hit the consumer services sector, sectors like transportation and restaurants and areas like that, that does give you somewhat more upside potential further down

the road. Eventually, I think these sectors are going to normalize, especially in an environment where the pandemic is just less of a threat, perhaps because a vaccine is available and will have been broadly distributed by the middle of next next year. So I think it's it's sort of natural to offset at least a part of any near charm changes in your in your growth forecast with changes in the opposite direction, you know, a few quarters down down the road. And I think in this case that strikes

us as the most likely outcome. I'll go. Of course, there's a lot of uncertainty about what happens further down the road. And I think also that the idea that if you have a larger hit in the in the near drama that that can weigh on your ability to restore activity much further down the road because of scarring effects. And there's something to that as well, But I think

that's that operates on a somewhat longer horizon. Probably. Yeah, let's build on this because when you talk about the potential for faster growth in two thousand twenty one, even as we see slower growth now, that also flies in the face of the market's expectation for inflation, when market aspect of this week's action has been a steady drip drip lower in five to ten year inflation expectations. Do you think that the market is wrong and that the FED is right in thinking that they can get two

percent inflation in the near term. Well, the Fed doesn't have two percent inflation for at least the next couple of years, so it still takes a while, and I would agree with that. I think will be below two percent for core PC inflation for the next several years. However, right now we're at one point two percent for core

PC inflation, and I think it's significant. Part of the gap between that one point two and two is probably related to more temporary factors basically distortions or or disruptions rather in the most COVID affected sectors. I think that is going to unwind over the next year. I think that is going to push inflation higher, but you know, maybe to the one and a half to one and three quarter percent range. So you're still below where you would want to be and what would be needed for

the FED to even think about hiking rates. But but I don't think you're going to be quite as low as where all now as far as markets are concerned, inflation markets in particular, yes, I mean ten ure CPI inflation expectations or break even inflation rates of one point

six percent. That does strike me as as law, and it's moved law, as you say, and so I would say I'm disagreeing a little bit more strongly with the market pricing on on on these break even rates than I than I did, say a couple of weeks ago when it was a bit higher. I think I think

that's the upside there. This is crucial, and this is one of the most heated debates on Wall Street and Black Rock coming out and sort of speaking to the debate that John and Tom are having earlier about the rejiggering of supply chains in the wake of the de globalization, and have that alone could really increase inflation, perhaps more than markets are expecting. Why is that not a thesis that you follow based on your expectation to one for one and a half to less than two percent in

the near term for inflation. I think it's a factor. I mean, I think it's it's going to be potentially a factor for the good sector of the economy. But I also would say that the service sector is significantly more important, accounts for you know, sevent of the basket. The good sector only accounts for about thirty percent of the basket. And also the potential impact of changes in supply chains, I think it's going to be spread over

a period of time. I don't think it's something that's going to have, you know, a huge impact in the very short term. But what what does have much bigger effects in the very short term, I think is these distortions or disruptions that we're seeing in COVID effected sectors, which are probably going to unwind more more quickly. So, you know, I think both of these factors are probably reasons to expect somewhat higher inflation. But but I think

the disruptions are more important. Yeah, and when did you last wear a tie? March? I have not worn since March. But I am not wearing just that's I think for the pandemic of Goldman sacks. Tom, I don't know what I think of this, the new trend on on Wall Street have no ties. I like to be a little bit. I got a lot of people lobby and you know, I'm into the stubble. We see what the no taie thing looks like. Look at this and by the way, it's not a skinny tie. I learned it's a slim

is a slim tie? Yeah, it's a slim tie. Just have you know it doesn't look great. John, now put it back on. Oh really, Tom, we're doing that again. We're doing his own radio. I think this this might work, taking social and radio like Tom without the bow tie. I mean I looked at those things with Tom on the weekend, and Tom has a bow tie. It works to get to those markets. Let's do the markets, those markets, mhm.

Let's get a conversation started with Amy wou Silverman, obviously Capital markets equity derivative strategist joins us right now, Amy, fantastic to catch up with you. This market not too concerned about October on November, very preoccupied with December. Why Amy, Hey guys, good morning. Yeah, I mean December seems to be uh the focus. You know. Part of it is there is this December four deadline when the state electors

are supposed to submit their ballots. And obviously the conversation has gone on for quite a while that we're going to have a contested election election where logistics and mechanics matter a lot um. You know, what one nuance I would point to is this is very true for SMPN vix, which has been pricing a higher for longer elevated volatility. This is not true in naztech, and it's not true in Russell. The options term structure that we look at

is actually lower December than in November. It's flipped in SMPN mix. And so I actually think that's pretty interesting because the market has been so so much driven by this you know, tech versus value tree that that is not being reflected in those indices. He me, what portion of this pullback, this correction is simply due to a bet on weaker economic growth? Does that play in big or is it just another small factor? You know, you know,

I think that definitely. You know, we sort of saw the market react to some of the data that came out as well as pals comments. Uh. If I put add a third layer to that, there have obviously been substantial option dynamics at play ever since August and even earlier, you know, referring to the soft bank trades as well as the retail option buying. So you know, the third factor that I see in play is also that there is this options dynamic we refer to as gamma, where

you know, it slices both ways. We saw that exacerbate the move up and we are seeing it exacerbate the move down. Uh. In you know, look in mainly tech names. But but as goes tech as goes the market because of the heavy weighting that it has had in the market. UM in recent times, you talk about tech and you talk about how volatility has largely been focused on what you call the fang a man stocks. I call them

the fan mag stocks. Pick your poison. How much risk is there too big tech if we do get a vaccine in other words, do they potentially suffer losses or just underperform? Versus the rest of the index. Yeah, it's kind of a million dollar question. Um, so far it

has been very resilient. One keep point that we look at the kind of look as a litmus test too to that answer is how an options, uh call option prices way over put option prices, So those have all been inverted through the entire some are meeting people are so exuberant on tech. We've actually now started to see that the change in particular in in the fangnag names or what have you. And so that makes me nervous. That makes me think that if there is a reversion,

it'll come hard. Let's go back to John Maggie one oh one, Amy, Well, we're just very simply here are we seeing a breakdown of a bull market? Can you call intermediate bear? Are you talking out right there? So you know, from our perspective, when we look at how the options went from complete exuberance and now I would say back to average levels, the the investors who are expressing their views are starting to show more bare sentiment. And then obviously that's sort of on a very short

term basis. So everything we look at in terms of the option prices are always sort of one month to three months. But if you look at those, we went from peak exuberance to historical relationships we never saw in terms of how bullish they were, to now back to

even slightly varish. And so as we head into an election and we get to focus more on index trades as opposed to single stock trades, I can see that, you know, turning us into an environment where people are much more focused on hedging and focus on the downside. Rusk Am he grant to catch up as old whites, especially this morning Amy with Silvan that of obviously Jim Paulson has huge advantage. He's not in the three zip codes of Wall Street, of the city in London, Jim

Paulson in Minnesota with the Loo loose old group. Jim, how have you changed your opinion in the last two weeks and this this chaos we're in, Well, I I guess, you know, I kind of look at it. You know, with the ferociousness of the rally off the march los, you knew that we're going to get correction at some point and um and generally corrections do their job. They scare you a lot. And uh, I agree this this

could have further to go. I really don't know, um, but UM, I mean, it wouldn't surprise me if we, you know, we do fall from high to some point. It doesn't have to, but it certainly could. But I guess for me, I think there's quite a bit of fundamental economic momentum here coming into this, and I think it's likely to continue to carry into the fourth quarter and beyond UM and I think that's gonna that's gonna

eventually turn this correction a little bit. And we're growing north in the current quarter in real GDP, maybe the fastest quarterly growth grade ever and UM expectations right now private sector economists for the fourth quarter for red off Bloomberg or five, which is really strong. I think it might even come in stronger than that if you just look at look at housing yesterday, look at the Bloomberg

consumer Comfort index that came out yesterday. Um. That is it's interesting that Bloomberg consumer comfort is in the upper courttile of its history right now. But John Ferrell, this is Jim is so good to bring this up as well. You know what, John, I don't see up thirty in the streets of New York. Do you see it on the streets of London. Not really, but there is a mechanical point to be my head tell him you go from shutdown to reopening the light selfie, switch it back

on again. There's a mechanical improvement. It's just there. It's just basic maths. And I just want to Jim, what are you saying that's mechanical just to bounce back from being shut down to reopening and what are you saying that it's self sustaining. You use the word momentum where you expecting the momentum to come from. I totally agree with you, Tom, there's a big chunk of this, you know, bounce that we've had was just turning the switch off

and then back on. There's no doubt of that. But I do think that turn switch back on creates a two momentum. I mean, we had a lot more fear when we had to switch off among consumers, among businesses, um, and that fear caused them to pull in, spending even more, costs even harder. That fear is less now, in part because we allowed some things to come back on, so there's greater confidence. You know, we still have an eight

savings rate among the household sector. Let's say they bring that back down to to twelve per cent or something over over the next few quarters or something like that. If they do that, that would be that would equate to dramatic growth in personal consumption expentures just that alone, and all you really need to do that is just

to generate some confidence. The other thing I'd like to point out is we've already dumped a lot of stimulus on this thing, and most of that really hasn't started to help yet, because it takes about a year historically before it starts to really show benefits in the economy. But as we go into the fourth quarter into the first quarter, that one year leg is going to be mad and I think that will we'll start to improve

economic conditions. Look at the impact that a lower mortgage rate has had on housing activity and auto sales in this country. Imagine what the impact of money growth fifteen fiscal spending, which I don't even think showed up yet, might have starting in the fourth, first and second quarter of the coming year. Jim, perhaps the phrase of the week is a healthy correction. Pretty Much almost every note that I've read has somewhere around healthy correction in it.

Yours included and you also say it won't be the last, and you reiterate the idea that we're in this bull market. You did say, however, say we are refreshing valuations. What does that mean? Yeah, you know, at leasta, I concur a little bit with your healthy correction. That's why I think maybe we have to have a moment deeper correction yet, because even myself, I'm just not scared enough yet. So maybe maybe it has to further, and maybe guys like Meal quit say a healthy correction by the time it

actually is getting closer to the end. I kind of concurred with that. You know what, I think there's a What I mean by refreshing regulations UM is that that we're bringing down the price of the market UM at the same time that we're starting to bring back up earnings. I mean, earnings estimates are climbing UM nearly everywhere, nearly crossed all sectors UM. And right now you've got uh SMP roughly and you've got one one year forward earnings

estimate from the street right now. You know, that puts it back down I think around two times or something. It was a lot higher not that long ago. So we are we aren't doing some damage evaluations and as we as we go along further, I suspect those earnings estiments are going to come up even more. So the market might look even cheaper by the end of this year,

even if it goes higher in the media. In the Jim right a half of me said Jim Paulson of Luthlthwayden right now on our politics, it is good to go abroad to get a different view. Julie Norman is at the University College London, or political science professor with wonderful credit on the Levant and the Palestinian and Israeli experience, but she joins us now on the Battle Royal in Washington.

Julie Norman calculate this weekend is the two candidates adapt and adjust to a debate four days away right on. So there's obviously a lot that's going to be going on this weekend. We expect that tomorrow that Trump's will announce the next Supreme Court nominee and that will of course just set off a really quite part is in Battle in Washington moving into the week of the debate, with really both parties trying to double down on a lot of the key issues that will resonate for their voters.

A lot of that, of course, coming on the backdrop of Trump's recent comments this week about the potential non peaceful transport of power after the election. So all that's going to be on the table going into the debate. Wait, going after the undecided, forget about changing somebody's vote, just going after the undecided versus getting the turnout of your base.

Wait that balance right now? Yeah, So this is going to be a challenge for both parties right now Trump's and continuously Trump has had a very strong following of his base, but trying to get other people beyond that

into his coalition has been a challenge. But again, the Supreme Court not donation might open up a possibility there there are a lot of conservatives moderates who maybe don't like Trump personally but are still pretty committed to conservative policies and values to the Supreme Court nomination will help

bring in some of those undecided voters. For Republicans for sure, and the Democratic side, it's a bit more complicated for Biden, really trying to straddle a very wide range of opinions within his own party from very strong special it's very strong moderate and given them on both sides of that spectrum, who may still be unsure about how enthusiastic they offer about Biden. Julie, We're focused on the presidential aspect of

the election. However, a lot of people in the markets are saying, possibly the more consequential election is for the Senate. Where are we in terms of a blue wave or a blue sweep come November. Well, that's certainly is where a lot of the focus and emphasis will start being as we get closer to November. Um there are a

number of key seats that are up for grabs. Democrats are of course really trying to emphasize this point again with a Supreme Court nomination, to suggest that if they retook the Senate, they would be open to pushing for some witting here took for fairly progressive or you know, not a mainstream policies such as increasing the number of justices on the Court, um increasing term or implementing um term limitations, or going over over other policies that Democrats

have been pushing for more of the progressive ways, such as ending the shillibusters. So Democrats are really pushing hard for this sense of can we take back can they exact the Senate, and if so, will they be able to really leverage that into some different kinds of political power. And there's also a question pairing that with the fiscal debate, how much would the Democrats passed in terms of a fiscal stimulus, a true stimulus once the pandemic is over,

versus the Republicans. Is there really that much daylight between the two plans? I mean, or is what we're seeing right now political scilly season, and there's actually our convergence between Republicans and Democrats on the fiscal support side than it may seem. I think we're going to be moving towards more convergence. Of course, there's been a bit of a stalemate since the end of August with the last

reel meaningful negotiations. But you know, I think after this week's um comments that we heard from Jerome Powell and other Federal Reserve officials to Congress really underscoring the need for fiscal stimulants, we do see both parties coming back to the table now, Pelosi being open to, you know, maybe massaging some of her initial numbers just to get some kind of deal moving forward that's necessary for the economy and those parties also realize that it's necessary for

the election as well for some of their their Keith seats that are ups for robs. Julie John emails in from Coventry and asked, tell us about the campuses. Tell us about you know, in the United States, we have a struggle here. I mean the news today is packed and football, peck twelve football, whatever it is, they're going to start to play football again. Yet campuses here are an absolute mess. Is it the same thing in urban

United Kingdom? Well, that's a good question. We are actually just going back to our classes next week, so our students are actually just coming back right now. I think the UK is dealing with a lot of the same

questions as the US right now. Is how much face to face to have, how you know, big of groups to allow students to gather in um It is a big question mark here too, But we do have students coming back to campus and everyone just trying to do their best to make the best year possible for them. Sounds a good question. Great Knowabiles Jitty. Thank you Jenny Norman the Unsty College London. Thanks for listening to the

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