Surveillance: Growth Acceleration with Dutta

you're saying on the blame bag. Well, I mean, one of the reasons why inventories fell in October, for at the retail level, is because we had a absolute blowout in retail sales. So think about what the inventory to sales ratio is looking like in the retail sector. I'm guessing lower. So I guess you know. One of the ways that a recession works is through some element of surprise. Companies think that things will be okay. Then something bad happens.

They have to clear out inventories and they're hiring and adjust their capex plans and so forth. But what if the what if the process works in reverse? What if company We've been talking about recession what since June of this year and companies have been adjusting to some extent. I mean, inventories have been being paired back, capex has been slaming somewhat um and what if they're surprised the other way? Now, what if growth is accelerating and the

recession they anticipated didn't happen. So let's get a teeth into twenty three. What we're really discussing here is what is wrong about a consensus. Deutsche Bank came out a little bit earlier this morning. I'll share this quote with everyone who might have missed it a little bit earlier. It's worth remembering that exactly a year ago, markets were pricing a fat funds rate of zero point six eight percent. By the end of twenty two, economists had CPI at

two point six percent. Given the huge forecasting miss over the last twelve months, it's remarkable how settled the consensus is around a terminal rate of five percent. Their question, I think, is your question? Should we be questioning five a whole lot more? Yeah? I think there is reskewed to the upside. I mean, when Chair Powell tells you that doesn't know what the path for rates will be, he just knows that it will be enough. I think you have to take that as a signal that they're

willing to do more rather than less. And if real economic growth is accelerating, which I believe it is at the moment, then that puts pressure on resource capacity and that in turn puts upward pressure on prices. So a lot of the things that people are talking about, um, you know, with respect to some of these bull whip effects, Um, you know, in household durable goods that could prove transitory. So um, you know, I hate to use that word, but that that's sort that's sort of where I come

down on this. I mean, ultimately, Um, you know, people look at what's going on with with with car prices and prices for household durables. Uh, they're coming down, Okay, rents are coming down, But if aggregant incomes are still growing at a healthy paste, all that's doing is freeing up people to go spend money somewhere else. And you know, if savings doesn't really go up, then that's going to drive up the prices for the goods and services that

they start to spend their money on. If you're bullish on the economy, does that mean you're bullish for risk? Ass it's for next year? No, I don't think so. I think that we're probably in for a period of below trend returns in the equity markets. So part that out to this idea that we're going to see better than expected growth in yours in your estimation, that you're

seeing ongoing resilience, that that's bad news. Well, I'm I don't want to fight the FED, right, I mean, you know it's it's it's it's it's it's um It's very amusing though some of so many of the people that you know following the financial crisis, Oh, the FED is just driving off stocks and you know it's the balance. Well, like now, if you don't want to fight the FED,

that means you should be cautious on stocks. I looked Neil at the math here on the second look GDP, and let's call it, and this is completely amateur, folks. We had a real GDP two point nine price index of four point whatever percent and we come out to some form of nominal spirit of seven point two percent. We finally got a risk free rate where you know, money actually is not free anymore. Do we adapt? How do we adjust to going back to what we knew

decades low, decades ago? With a substantial nominal GDP money now actually costs something, and I don't send any gloom from you will be fine, right Well, I I don't know. I mean I think that, I mean, I think my view is that if you're thinking about the next two three years, UM, we will probably have a we need a period I think of below trend growth to ring

the inflation out of the system. Right so, even though we may be accende real g d P yeah, most likely faroly over JP Moor and John is like even lower than that as a run rate, I'm not gonna see at a point four twenty three. But the question is the question is I mean, forecasting out twelve eighteen months is difficult. What I have more confidence in is

what's happening right now. And right now, you know, even if you believe that we see some below trend growth for a longer period of time, right now things are looking a little bit better. And so I think that's really the tension. When they started talking about non convertible that what do you hear when you see that in a statement? Because we had a story of two parts

around the last fat decision. You have a statement, Then you had the news conference can you walk us through how you interpreted the statement in that line which many people a tribute today. I think I think the Doves made a great trade. I mean, if you're sitting around the farm c table and you're layle brainerd you got them to codify that into the statement in exchange for them to say something about neutral interest rates and you know, sound puffing their chest at the press conference. And but

that's all later. That's like five six months from now. Lots of things can change, the data can go their way in the Dove's way, So you're trading the certainty of stepping down to fifty basis points now in exchange for the uncertainty around what neutral rates maybe. And so in my in my in my view, even though um, you know the that was a down day for markets and financial conducis titans, so the hawks looked like they may have one, I think actually the Doves played their

hand pretty well. And and I think that's again that's part of the problem that it's it's too soon for the Doves to be winning any of these debates. This is the reason why there's so many people who still believe that the FED is going to not raise rates to the point that you're saying that that perhaps five will be the ceiling, and that they could even start cutting rates next year. What gives you confidence that the Doves aren't going to win another trade, that they aren't

going to make something else? That really complicates the message when you say don't fight the Fed. Is I think the data the data will make it. I mean to me, the data will not make it tenable for them to make their case for cuts because the unemployment rate would not have gone up enough in order to justify that outcome. And you know, look, look at what's already happening. I mean,

interest rates down. Oh, look what's happening. Purchase applications going up for more, mortgage demand is rising, um, the dollars going down. Have you looked at the performance of industrial stocks lately? Global growth may well be picking up next year. What do you think that? What do you think that's going to mean for US manufactured exports? So what if companies are done with inventory adjustment and so? Do you

not share the housing gloom that's out there? It's tangible? No, I mean, look, the housing market is the one area where the FEDS policies has gotten a lot of traction. But now, uh, interest rates have come down a little bit, and that's unlocking some activity. And up is ultimately up. I mean this is one of these arguments, Oh, look at new home sales. It's all about cancelations. I mean, give me a break. I mean, up is up. The fact that the fact that people are signing new home

sales up. No home, new home sales are booked when a contract is signed. Are people not knowing what the interest rate is when they signed that contract. The fact that they're signing the contract knowing what the rates are is a sign of confidence in and of itself. If you look at the last Conference Sports survey, they're the last couple of conference sports surveys. People see rates to be somewhat lower in the year ahead, and what happens,

buying conditions for homes go up. So I think if, if, if, if the Fed pauses rates come in, I mean, yeah, residential investment is not going to be as much of a drag in Q two of next year as it is at this very moment. We haven't mentioned. It comes on a proba, he says, long, Sterling, I'm bullish Sterling and Rishio and now back up to one twenty got any more exactly? No? Ever? Nice? Do you have a sweater to go with your tie? For those you? So we're looking for the Christmas so we play this up?

Can we sit in because I'm getting people rank and look like pap a grain with laser and sang it's not ranked. But these are dear with with sets around him. Yeah, nice, big ears, it's like that. Now he says that right here, do you have a sweater to go with this? Can we get you on before Christmas? With this? Sure, I'll be happy to put on my Mr Rodgers look for you. Very good. We can do Christmas sweaters? Are we doing that? Please? Do you know I think that you should with like

a little bow tie around them? That I think really of course, little like pump pumps and little very joyful guy around, very joyful man. Iron Jersey owns the high I didn't know that doesn't sweater territory. I thought you did football scoffs. He's good, same thing. It's a scarf sweater. Carboy joined this now. Senior investment strategistic Edward Giants might not have to say. Reading through your work, you sound a little bit more constructive. It's what does that constructive

you come from? Yeah, thanks, Sean. Look, you know, I think we have a journey to get to that constructive view. But it's certainly the FED is still on this path to raise rates. They've made it clear they are not done, and in fact we're probably heading towards that five percent

level early. And of course the focus is shifting somewhat in markets from this inflationary ongoing upward pressure to perhaps some stabilization, but then of course a shift towards what happens to the economic growth picture, which we think does soften, especially in that first half of UM, but perhaps a

silver lining. And that more constructive view comes from the fact that we are perhaps set up then the stages then set for potential recovery from a market perspective, and keep in mind, the market cycle and economic cycle are two different animals, and in fact, markets can you know, head towards a low, make a low, but then rebound even as we are in perhaps a downturn or recession. And so I think that's where the constructive view comes from.

And of course the hope and the leading indicators of inflation that are showing that stability ahead in the next year would you explain surveillance one oh one that the world doesn't end if we get a five percent terminal rate. We've been there before. Why are we so angst ridden this time? Yeah, a great point. And in fact, if you look at you know, a thirty year history, a five percent FRED funds rate is not out of the norm, and a treasury yeld certainly at three and a half

to four percent, is not out of the norm. What we will say is unique this time around versus the last ten years, perhaps the period after the Great Financial Crisis, that's when the FED was perhaps closer to the zero bound, treasury yields closer to two percent. That whole period was really marked by a growth out performance, growth versus value. This period ahead is unique in the fact that we

probably won't head back to zero bound. You know, the FED can go from about a five percent rate over time, perhaps back to a more neutral rate two and a half percent range, let's say, um, but yields treasure yields in that environment may also remain in that two to

three three and a half percent range. And so what's different, I think, is that you do have an alternative to equities and play probably a better mix between bonds and stocks in your portfolio, but also that environment where growth outperformed for perhaps close to a decade UM, it maybe look a little different in the next decade ahead, and that because yields are higher, we could get a better

balance between growth and value as well. What if Evan Brown of Ubs is right and we avoid a recession next year and that ends up being really negative in terms of creating higher rates for longer that bleeds into an over indebted society, which a lot of people say is the case. How's that factor into your outlook? Yeah,

you know, it's interesting. We don't necessarily think the path to a soft landing is completely closed either, but we do think it's getting narrow, and a lot of the leading indicators that we watch, including the curve but also things like the p M I S and I S M indicators are pointing towards, if not recession, at least a softening below trend. So, um, we do think that

is in the cards. But if we do avoid that recessionary path and hit the soft landing, um, we do think actually markets will respond favorably to that to some extent. You know, I think the jobs picture will be in decent condition will have a consumer and healthy shape, and in fact, you could get through this period. We think the inflationary pressures were largely supply side driven, UM, and

the demand picture will soften it. So we think inflation could come in as well, and so we don't think it's necessarily this dire scenario to avoid a recession here

in the US. But keep in mind recessionary cycles are part of the business cycle, and so we do think at some point the excesses that have have accumulated over the past you know, two or three years UM, that will you know, play itself out in some to some extent, and perhaps we will won't see a broader recession, but we could see what we're calling that rolling recession in certain sectors, and perhaps are starting to see that in the tech sector, which was probably where a lot of

the excess has happened during that pandemic period. UM. But I think your broader point, you know, with debt increasing and yields moving higher and perhaps staying higher, UM, we will see a little bit of a clearing impact on the credit side as well. But probably a good thing for investors who are looking for value. Someone I just want to squeeze this in twenty seconds. Can you be super specific why you think the leadership is going to

come from. Yeah, we think heading into the year, we could still see this defensive value play have a little bit of legs because we are in entering a period of potential downward tim in the economy. But as we re emerge from that, we think the recovery playbook is back in play areas. You know, parts of quality growth will probably take some leadership, but cyclicals and maybe even that small cap sector um will return as well. So think about more balance in your portfolio heading into Thank you,

omistic constructive. That was the constructive. I'm not doing crystal ball. I'm looking at the present, which is what Realie is doing. She's global chief investment strategist of black Rock. Helped us out in London when we were there, uh a number of weeks ago, and we're thrilled you join us in New York this morning. I'm gonna cut to the chase. What's changed here not the crystal ball that John mentions, but what changed is that we have a risk free rate,

we have cash as values. We're getting on our iPhones, YouTube can make three point two percent. You know it's like from another time and place. Now that the risk free rate is back, we have almost a real money environment. What does that mean for as an allocation? Well, as we enter this new region, in fact, well already in this new region where it departs from the Great moderation and now we're in a word shaped by supply, in our view, it needs to require the rethink of us

a location. You talked about free rate. In fact, we think that the new region requires a new playbook altogether. So we talked about forecast for next year, and we believe that even as we enter a recession, which is our expectation for next year, inflation could surprise on the upside. It's going to be lower than what we have seen so far this year, but you could surprise on the upside because we believe central banks are not going to go all the way to fight inflation to bring it

down to target. And at the same time you talked about consensus by nour risk of we're not that constructive on risk center. You underway equities, where underway equities, We remain under way equities at this juncture. But I think what is more important is when we would become more constructive, and we expect to be more constructive at some point in twenty twenty three, and having the mechanism of gauging

when to turn positive is important. Sizing the damage of the macro scarring as a result of central banks overtightening and also understanding to what extent that damage is in the price is going to be critical as we think about when to turn positive, and also importantly as written positive, it's not going to be the prelude of a decades long booll market that we have seen in the past. We believe that there's going to be a lot more volatile,

a lot more trophy. And again here size in the damage, understanding what's in the price is going to become what's shaping your view about that shift in the market, right shame, what drives you towards making that conclusion. It's very much around our conviction that we're in a word, shaped by

multiple factors of supply constraint. Yes, of course, energy prices coming down a little bit and some of the supply bottlenecks is getting alleviated, but looking beyond that, we're still face seen three structural catalysts for elevated inflations in the long term, so aging demographics. You know, over the last fifteen years in the US actually participation rate went from sixty eight percent to sixty two percent. There is wholly

explainable by aging demographics. And also we have geopolitical fragmentation that represents further supply constrained restoring French shoring, as well as the net zero transition, where we believe that there will be a mismatch between demand and supply. Just like during the pandemic, there was a mismatch between demand and supply and that pushed up inflation. So we see this persisting, which is why even as inflation goes down, as we look at next year, we believe that it's going to

settle higher versus the pre pandemic levels. Even that, how much conviction can you have going into long duration currently, we actually want to push back against this notion that as we enter a recession you just automatically hide in long do raction bonds, because this recession is going to be caused by central banks over tightening. This is previous recessions where central banks are expected to come to the

rescue and cut rate. We actually don't believe that the developed markets central banks in particular, the FED is able to cut rates next year, Marcus surprising. Ray cuts are pretty aggressive ray cut cycle. But in the face of this persistent inflation and supply constraint that I just talked about, we believe that they're gonna high and stay at those levels for an extended period of time. This is an important day for China. One of your leaders has died, and I want to go back. Before you were at

the University of Cambridge. You did something no one we've ever talked to did, which is you did the mathematical Olympiad in your China, not once but twice, which is, folks, trust me unheard of. How do you perceive the leadership change that we say. I don't want to get in trouble with black Rock, but the new China or the next China, what does it look like to you and

the stayver gendas. I think one beak takeaway from the Party Congress earlier in the quarter is that the focus is broadening out from growth to social coherence, common prosperity in national security, and what that means over the longer term is that we should expect a lower trend growth for China and also in terms of the transmission mechanism from macro to micro would become less efficient, so all of the warrants are higher risk premier as you think

about incorporating China in a Hope portfolio context, which is why technically when neutral China asks even as the country opens up, but strategically we're actually underweight China government bonds because of the yield attractiveness becoming less This was brilliant. I'm going to take the opportunity to to promote some of the research for a Black right time, because I think a lot of people outside of Wall Street they

find it differ undower certain research. Not to be clear, hits on the Investment Institute weekly No is available online on the website for everyone and it's a great rate. Always enjoy it. Whitely fantastic from Black. Let's do this, folks. Let's go to someone that can piece together You're November

and try to stagger into two thousand twenty three. They do that at Deutsche Bank, led by David focus Landau, and he has as his chief international strategist Alan Ruskin, who has been such a supporter of the show through this crazy year. Ellen, I want to go a little bit technical right now. The Bloomberg Financial Conditions Index, which I think the great Michael Rosenberg told me, is eleven ratios. The fact is, over November it has become more accommodative.

On a standard deviation basis. We moved from the gloom of a negative one standard deviation almost back to negative point five zero standard deviation. We are more accommodative. How does that change Chairman Powell's each today and the FED

meeting forward? Tom, I think it's a great question really because I think on the one hand, Chairman pal will just look to what the FED fund futures are pricing in and it's looking for a peek in fat funds, and around five percent I think that would seem pretty reasonable to him. Then you look at really what's happened since the last firm C meeting, and you know, as you remark, every component, every major component of the Financial

Conditions Index has ease substantially. Obviously, the bond market particularly, I think it's been driving things. Some of this is very much related to c p I, but you've also got tangential markets, things like the oil price which has come down very sharply. I think around the fm C was tracking around ninety dollars a barrel, and the w T I it's now eighty dollars a barrel. Um. It's just everything is pointing in a more constructive way. I

don't think that's a terrible thing from your standpoint. I think it's once something you've one to monitor, but I think it takes away to some extent the fears of particularly sharp slowdowning growth. I thought Drugging was so good on this at the ECB. The economists from M, I, T, and L, and you are as well in your research. You know, you spend a lot of time on the when. The way we frame this, folks, our listeners and viewers is the X axis. Think about that chart you made

in school, Allen Ruskin. What matters on the X axis right now as you go out in the next year and indeed into two thousand twenty four. Where is the when that you're focused on? Yeah, well, I think you know, people ask questions on the when related to when will we have a recession? And the main recession indicated that people have been looking at. Of course we all focused on is the yield curve, and that suggestive of a recession.

Normally it leads by roughly about eighty months to two years at long lead time, and that would suggest pretty much the second half of three is the when on that particular question. When we look at other leading indicators, of course you're seeing something which is on a path towards a recession, but it is not saying a recessions

baked in the cake. The one point of that I would say to them that I would emphasize, as we are all looking at the same thing, and the yield curve could give some misleading signals given the supply side shock, and it's a favorable supply side shock that we're currently under at the moment. You know that that that could certainly lead to more flattening of the yield curve than you would otherwise think. And I don't think it's quite as recessionary or as stronger recession signal as it would

otherwise be. Lisa, can we have a victory lab from Matthew Lozetti a colleague and Mr Ruskin he nailed the recession call. That also the win of it in hindsight out farther. Remember we were given him grief because he was talking end of two thousand twenty three. Whatever I mean Lozetti nailed so far, and a lot of people

are on board with that. The question that I'm wondering, though, exactly to your point, Alan, is a supply side issues which we really don't understand in terms of whether they come back online, whether you get those production delays that are eradicated, especially with COVID zero. What's your base case in terms of supply chain disruptions and lack of supplies, and whether the ease is enough next year to really reduce some of the inflationary pressure. I think it's easied

enormously really. I think if you look at supply deliveries in particular, in most indicators, they've actually you know, normalized the pretty much got back into the range that we saw pre COVID. When you look at p m my prices paid, those numbers are typically also within the zone of what we saw pre COVID as well. So I think there's reasons for optimism on on the supply side.

I think, like everybody, you know, the biggest concern is that inflation has been around for long enough that has become entrenched in the labor market, and you know, that's I think where the residual inflation pressures still reside and that's really you know, which is gonna It's really going to create angst amongst the sed you know if we see employment cost index and not come down the other way to indicators like audio and he's not come down. Which is a reason why a lot of people are

watching jolts today and on Friday the jobs report. People are also watching the housing market reports to get some sort of sense with respect to your core, which is Fax where you started. And I'm wondering Vasilius Tunakas yesterday of City saying that the housing market may be the biggest distinguishing feature between the winners and the losers internationally, the ones that have the worst housing markets might end up suffering the biggest weakening in their currencies. Do you

buy that? Do you see that as a as a as a correct roadmap? Um? I think it is an important roadmap and in most cycles it tends to be dominant. I would say here in the US at least, the concerns on housing are probably a low exaggerated. Starts is one of the housing starts one of the best indicators, permits one of the best indicators. But I think you can have house price deflation come off quite substantially without it being too problematic for consumption, in part because house

inflation was so strong to begin with. I think on an international side, the countries I would worry about. Most of my colleagues in London have pointed the Start, Sweden and Canada those of the countries where the debt to relatively disposable income is most problematic, the financing issues are most problematic. So I think you have to watch Canada, the Canadian dollar and the Start. You really those are

the vulnerable currencies. And I know you are buying Christmas tree to keep up with the Faroe family and Farrell had a tree up away before Thanksgiving. I'm going out today on demand of afterthought and I need to make a fects trade here. Dollar up four off the bottom? Can you stay resilient strong dollar this year? And what's the best way to play it? Yeah? Look, I think

the dollar has almost certainly peaked. You know, you don't get these sizeable moves without usually some sort of follow through. But I think we're going to have a bit of a bumpy year as it were, because you know, the Fed is obviously saw tightening. We've still got to get to at least a five percent funds rate. If they're risks in terms of the funds rate, it's probably still to the top side rather than to the downside. So

you know, that's going to bolster the dollars case. I think over time we're just building an effectively a base on euro dollar between parity and say one oh five, for an eventual assault on sort of one ten. Uh. You know later in the year, Alan want to put a from twenty three that is yeah, Alam Ruskin at Deutsche Bank. Allen, thank you. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven

to ten AMI Eastern. I'm Bloomberg Radio and 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