Surveillance: Hard Landing with Dudley

housing market. Michelle Meyer has changed the shingle to MasterCard Economics. She is the US chief Economists at MasterCard Economics, and she is brave this morning to come on Surveillance. Michelle, boy, it's your language changed. You're moving from the big bank out the MasterCard. You are all wallet share and wallet shift.

How much is my wallet shift after this weekend? Well, Tom, it's wonderful to be back on with you, and thank you team for for having me back and being able to now honor to be able to not represent and that's to part Economics Institute. As you noted, Tom, it's really is about the consumer. The consumer is the pulse on the economy and what we're paying really really careful attention to is whether or not you are seeing those

wallet chair ships. Right, we're able to, you know, really get an understanding of of of the trends in consumer spending on a granular level, you know, in terms of the different categories. Spending on experience is spending on goods and clearly spending on you know, necessities. I mean, I think that's one of the key stories right now is with the inflation shock of really concentrate and necessities food, gasoline. You know, that's been a big, big, big increase in

the parents out there. Tuition and summer break is under experiences. Just in case you didn't know that. What do you learn from charge cards? I mean, your granularity in the housing market was legendary. When you look at what we actually do with our various sundry charge cards, what does

you tell you about our share and shift? Well, look, I mean clearly, the the data is robust and and uh you know, I mean the main data who we're looking at the master card spending pull Stata, which is going to be able to capture all types of emails to some extent um. So it's a really holistic view of the consumer um and right now, you are seeing

the consumer generally still bugging along, spending very strongly. Out of course, we are looking at nominal spending trends, and part of that increase is reflecting what you all were just talking about with this this incredible inflation environment. UM. So once you adjust for that, real spending is you know, clearly more more modest given out price pressure. UM. But the consumer is still out spending on a variety of items, whether it is those necessities or still even durable goods.

You know, we're looking at things like furniture spending, which is still looking very strong. Tom, you mentioned my love for the housing market which still exists, and we're looking at you know, really um detailed spend on housing related items, which at the moment are still looking quite strong. And Tom was talking earlier Michelle about Kent tiles of of income. How much is what you're capturing really the upper echelons of earners and not necessarily a holistic picture of the

entire consumer market. Well, I think whenever you're looking at some you know, high frequency data that's not the official stats coming out the government, you have to consider what your panel looks like and what you're capturing. For the for the broad economy. I mean, my senses is that it is a really good representation. Um, you know, I think the general risk is that the very tears are probably a little bit underrepresented. In the middle of the population.

Is really what we're grasping there, um, you know, for for the really low low income folks that aren't using other types of payments, that are mostly using cash, that's gonna be a really hard thing to capture in any of these types of high frequency data points. Um. But to be able to get that pulse of that you know, middle income consumer, I think it's really the key. The reason why I asked Michelle is because for a long time,

people didn't even have to dig into their savings. They had so much cash they could just keep deploying it. I want to get a sense of whether the ongoing spending momentum that we're seeing is really coming from people continuing to dig into their savings, or whether they're starting to borrow more, whether they're starting to leverage up, and

whether that could actually get crimped by higher yields. Yeah. So, I mean, if you look at the past year, it was extraordinary and that we had very, very low debt right the debt debt service ratio, the financial applications ratio hit wreckor lows across a variety of income cohorts. And meanwhile, we had extraordinary amount of savings given the environment we were in, which was this you know, spectacular physical stimulus and montary stimulus. That's reversing right, the fatas hiking interest

rates not saying the same degree in fiscal stimulus. So naturally we're gonna say reversal there. We're saving starts to come down, um, and leverage starts to come up. That's where we are in the cycle. UM. So it's quite reasonable. And I think that the silver lining is that at least we have those buffers UM. And that's really important to keep in mind when we're thinking about these headwinds that are hitting the economy is what's the starting point?

And the starting point for the consumer is a more solid one than we've seen during prior cycles. Brian emails in from over by Hill's Kitchen, and Brian Michelle is asking you what the when you look at all the charge card data and that what does it change to the duration the X axis of your inflation? Guests, Brian

wants to know that before eight thirty this morning. Help sure. So, look, I mean the inflation story I think is very very clear, which is that we are an environment where inflation has risen meaningfula particularly well, come on, come on to the chase. I'm not talking to Alexander. I'm talking to Michelle Myer Willing. Inflation sustained or do you buy the story inflation is going to ease up? Brian hold on, Brian, he's on the phone here, Brian hold On, Okay, go told Brian,

doesn't give you one minute. Um, Look, I think inflation is going to come off these extraordinary highs, but not to play, not quickly. Um, there's a running of price pressure. Inflation expectations have increased, and companies have pricing power, and consumers have the ability to spend more as well, given that they're also seeing wage increases. So you have both a wage push and a cost push, and that is meaningful. So it's gonna take a while for that to come

off entirely. That a clear answer. That was great, That was classic. That was like, it feels like this v body course would be Bran report. Accompliments to Michelle. Thank you. It's gonna catch up. It's always right to see a master Card. You know that Michell of master Card, Dan Skelly, they head of market research and strategy of Mark and Standing Weft Management. And then let's stop there. You've been

right this defensive shift. The question I think for a lot of people and equities at the moment is whether there is a tanctical opportunity to lean the other way? What would you say to those people? Not yet? Jonathan and so in good morning, Jonathan and Tom and Lisa. So look we're not there yet. UM. The bond market, the interest rate expectations have come a long way, as we all know from last fall, UM. And so look the markets are now called it nine ten percent off

their January all time highs UM. But we don't think there's two things that are priced in at these levels, right. So if we're expecting these rate heights and the markets digested that with just a ten percent move, what can

we expect for QT and for balance sheet reduction? And we can talk more about that, but also what can we think about in terms of the hits of the consumer and owns that our economists, as you know, recently marked down her GDP forecast for this year by about a percentage point due to higher oil and gas prices. So we're not there quite yet, Jonathan. We're also, we would add, we're entering a seasonal weak period. We're gonna

have some tax bills come do. Maybe Tom just finished his as you as you noted, but the summer months are seasonally weak for the markets. Dan. When you take a look at tenure yield it's almost at three percent. At what level do they start to matter? I mean, we talked about this and I go back to something we talked about two years ago, and it's become almost obsolete at a time when yields have gone far faster and far higher than a lot of people could thought.

What are you looking for here? So at least it's your point. You gotta consider two factors. One is the level and the speed and the pace of the increases. And look, I think to date we've seen equity markets discount incredibly fast paced. Right, so we've seen that last call it three or four months. We're just talking about how fast the pendulum swung in terms of great expectations um and so look, I think you've seen most of that discount in the equity market. On the other note,

when you think about level. Look, we've been arguing Mike Wilson via his valuation math, has been arguing that higher rates ultimately get translated into lower multiples. Okay, and we've seen multiples come down quite a bit for the index, but we think there could be further d rating to go. And so you know when you talk about like um

an absolute level that really matters. If you get that much above three percent, call it three and a quarter, now, that's going to take another couple of multipoints, multiple points out of the event. Then I look at the index now and I look at sectors, and I just simply put do I want to be passive or do I want to be active? Here? Definitely a time to be active,

tom And truly an excellent question question. So the last several years really going into COVID and coming out of COVID was marked by a really tremendous wave for passive. Right you could be in the index and do incredibly well, a period of high returns at absolute low volatility, and and frankly that repeated the previous cycle that was the case from O eight oh nine until UH and things have really changed. We've seen a true regime shift tom at all levels of the economy in the market, and

we're seeing volatility obviously increased. We've had tremendous volatility this year given the Fed interest rate cycle, but also geopolitics obviously everything going on tragically in Ukraine as well. Uh And so given higher volatility, given a late a cycle that's a pre approaching late innings, we're seeing the greater

dispersion between stocks and sectors. And to the point earlier, you want to be very cognizant of which sectors you overweight, and so the defensive sectors have started to emerge as a leadership group. They don't happen to be uh tremendously overweighted, and some of the market cap weighted index, as you know, just to round things out, we can squeeze this in.

I think, is it strange to see this with it's up fifty visis points of the last couple of weeks on a tenure, to see the defensives do so well, the utilities erupt, they outperform, healthcare up, the likes of the banks down and down hard. What does that speak to you? What does it tell you about where beyond

the cycle? Yeah, it's an excellent point, John, So you're seeing mixed messages from the bond market and stock market, and typically what we've observed over time, and Mike's written about this, is that when you see that divergence in message from fixed income, from the bond market and from the stock market, typically stocks are telling you very interesting signals.

And so to your point, that defensive leadership is telling you definitely that stocks are more worried about growth, right, and so that's the tricky tradeoff that the bet is certainly going to consider them the next several months. They've talked very aggressively about doing everything it takes to tame the inflation tiger and put it back in its cage, but we don't know if that's possible. Dan Scalia, Morchus Stanley,

Thank you, sir. This is the must read of the morning, because not only does Bill Dudley's an academic, but also as someone stealed and market economics as he was for years at Goldman, Sachs really gets out the timeline and says when and what is so important here in speaking to the former president of the New York Fed is he addresses with courage, not the easy guests of the seventies,

but things to learn from the nineteen sixties. William Dudley senior advisor to Bloomberg Economics and writes uh for US at Bloomberg Opinion. Bill Dudley, Robert J. Samuelson of The Washington Post and his magisterial The Great Inflation and It's Aftermath. Why is now like Walter Heller and Vietnam. Well, one, we have lots of fiscal stimulus like we did then, and then we had the Great Society Programs in Vietnam war spending. And the second thing is the labor market

is extraordinarily tight. You know, everyone's focused on what's having a headline inflation and has it peaked? And I think they're missing the force from the tree is here, because what's really going on is the layer market has not been this type in many, many, many days. And that's the problem because if the layer market is too tight, wages are going to continue to strengthen. And if wages continue to strengthen, we're not going to go back to

two percent inflation. Bill Dudley, that intern at Goldman Sexyn Hats said that on the show here a couple of days ago that the labor market is shockingly tight. Does that lead to the wage spiral? Michaelle Meyer just spoke about it, and frankly, that is the collective memory of the sixties, isn't it. Well. I'm not sure how fast what inflation will go up because we have a lot of other factors pushing inflation down. But I think the key thing to focus on is if the labor markets

this type, what's going to happen to wage inflation? Wage inflation currently running around five and a half percent, depending on which measure you you use, five alcent wage inflation is not consistent with the sense to percent inflation objective. So how do you get inflation down? You need to push the unemployer rate up, and that's the problem. Every time the federies are added type Terrey policy enough to push the unemployment rate up, they've ended up in a

full scale recession. The key question just when is this gonna occur? And it's not gonna occur in the near term because the Fed hasn't yet made Terrey policy type might not even happen in twenty three because we don't really know how aggressive the fenter reserve is going to be in terms of tightening Terrey policy but if the FED delays, all that means is inflation will get more entrenched, and then they'll have to do more later. So a hard winning is inevitable. Whether it happens in twenty three

or twenty four, that depends on the Fed. Do you anticipate they will delight by somewhat you've heard Bill? How do you think they will respond to a mechanical peak in inflation this year? Well, I think they're gonna take some signal from the fact that inflation is coming down because it's going to support their story about the transitory factors being a primary driver of y. Inflation moved up.

But you know, if inflation is eight percent for a year and then two percent for a year because all the transitory factors are washing out, the average is still five. And you know, if the labor market continues to tighten, which I think is likely. You know, the automployer rate is already it's a three points expercent. It couldn't fall even further. Uh, it doesn't really matter what happens the transitory inflation what It doesn't really matter what happens in

the headline inflation. You have to look beneath the service. What's actually going on in terms of the tightness of the liver market and its consequences for wage inflation. Bill, what you're saying is pretty radical. You're suggesting that perhaps the FED should cause the hard landing sooner and closer to now than wait, because the consequences will be that much worse. Is that accurate? Well, I don't know that

they should cause try to cause the recession. I mean, I think they should always go for the soft landing. But what they need to do it they need to make Monterrey policy tighter sooner. And I think the big discussion here about what what whether the fifth one a good job or a bad job? Is the timing. We're still at a quarter to a half percent federal funds rate at the time that the unemployer rates three point and you're over your CPI inflation is eight and a percent.

It's remarkable the Fed's late. They know they're late. That's why we're talking about fifty basis point right high. Each of the next couple of meetings. The FED wants to get to neutral very quickly, if they haven't really signaled much appetite for going very far beyond that. If you look at the last summary of economic projections. The Madre policy setting anticipated in at the end of twenty three was just a very tight, very very very modestly tight

Monterrey policy setting. Well, but right now I'm looking at work that page that forecasts where interest rates will be, and in February three it's currently above two point three percent. When we talk to strategists, they say this is priced in. What should people be pricing in if your world were

the one in which the FED moved at an appropriate rate? Well, I think, I mean, I think the Fed needs to make Montreal policy tight, and I think that I've been saying this for quite some time that that requires short term rates and at least three or four percent. Obviously, it depends on where inflation ends up. The inflation is running three percent, then neutrals, not two and a half. Of inflation is running three percent, then neutral is more like three and a half to four. So it really

depends on where inflations. I mean. But when people talk about the neutral federal fundrate, they act as if that neutral federal fundrate doesn't matter on what underlying inflation is higher their line inflation higher neutral feedle fundrate more for the federal reserved to do in terms of tightening moder policy, but just to clean that up just quickly, just on the timeline, do you anticipate the longer they wait, the higher the peak and the Fed funds right will have

to be yes, yes, Because the longer we sit with a very very tight labor market, the more upward pressure they'll be on wages. The more that upward pressure on wages will feed into prices, and so the underlying inflation rate will accept tend to drift higher. That that's really the lesson of the nineteen sixties and the early nineteen seventies. Each cycle inflation radgeted higher because the Federal Reserve did not address that the issue forceful fully soon enough. So

if they delay, they'll have to ultimately do more. But a fascinating raiding. We appreciate your time this morning, as always, fantastic build down ply. The Blimberg opinion columnists and former New York Fed President and Provocative rights to a conclusion that reads as follows. The FEDS choice is clear. If it acts sooner with inflation expectations still well anchored, the cost in terms of folk on output and higher unemployment should be relatively modest the final line of the whole

pace tom. If it waits and allows inflation expectations to get out of hand, the bill will be much high. Elena Poula Covid joins US now the Center for European Policy Analysis. Elena's is the last time we have seen you. Things have changed. A flagship of the Russian navy has sunk. How does that change Mr Putin's body language? Well, the sinking of the Muskvab that's the name of the ship,

was definitely a big hit to Russia. We even saw Putin supporters, the talking heads in the Russian state control media being really critical of the sinking of this flagship vessel of the Russian fleet. It's not just the flagship vessel of Russia. This was the largest ship operating in the Black Seat. And what we've seen since then is Russia and Mr Putin doubled down on their tax on Ukraine.

Just today we saw Russia hit with missile the western city of viev Does Ukraine double down with this success? And where the material they're getting from the west? Is Ukraine more able to maybe not the drama of sinking a ship, but do you perceive that they are engaged and ready on this Monday. They've certainly been getting ready. In your president Zelanski has been making his rounds with all the western capitals and beyond that, fleeting from more weapons.

I think the situation we're seeing now is that the window is really narrowing. Russia is starting to target those supply lines. Now. We can't take it for granted that we've been able to meet in the United States and allies have been able to get those weapons into Ukraine. Not Russia is targeting those UH military routes. So it's going to become increasingly difficult. The Ukrainians are certainly tired.

They understand what's coming, a huge new offensive. Um. I do think they gave themselves ready, but um there's still outnumbered. Are now gone by the Russian side. Elena can give the sense of what happens when or if Mariupa falls. We understand that it is surrounded and it is an a crucial piece of land for Russia because it provides a land bridge to Crimea and connects to the don Bass region of eastern Ukraine. How much will that be

a game changer when that occurs? So the Manupa, you know, it's a it's a town that not many people have ever heard of. Even a lot of Ukrainians hadn't hadn't heard of it until it became this big strategic battle uh for for the war. And even back in ten we saw Russia try to surround Marupa and they failed, and now they're you know, wrapping up the unfinished business. In some ways, it will be a game changer from

a military perspective. The main reason for that because right now, the only thing that stands between Russia's Eastern front and sort of southern front where they have access from the sea from Crimea where they can do an amphibious attack and landing, for example, the only thing that's standing and then being able to combine and join their forces Marupa as soon as that happens, and unfortunately it is looking like it's just a matter of days until Marupa falls.

Russia will be able to then put you know, let's say marines in navy in from Crimea, take them to the east. They'll be able to combine basically the southern and the Eastern front and cut off any Ukrainian troops they are it will have been able to get in so far, But you know, what does this mean in

terms of the longer term? Also, because we've heard from Vladimir Zelenski that this is game over for peace talks, it seems like that's likely anyway, given some of the images and and the and the rhetoric coming out from both sides, given the fact that frankly, the humanitarian crimes that the West is looking at to achieve this have been stark. How does this move the conflict forward in

terms of the length and in terms of NATO's involvement. Well, it certainly is giving Russia and would give Russia a big upper hand, would give a much broader control of Ukrainian territory, opportunities to launch much more offensive attacks. I think it also makes the options for negotiations far far more limited. They already were very very limited to begin with. But clearly, you know, what we're uncovering in areas where the Russian troops did leave around the capital Kiv is

a cruesome. It's atrocious, and that's likely, uh, not even the tip of the iceberg as to what's been happening in places like elsewhere. So I think it's going to be a prolonged conflict. You know General Milly said this a couple of weeks ago congressional testimony. We're not looking at weeks or months or looking at years, and I think that's really what we need to be thinking about, is the alliance real? Trygedy, Elena, Thank you, Elena. Probably

a coverdet the Center for European Policy Analysis. Some guests have to wait in the class act. John Lipsky has of course waited for us for this morning with JOHNS. Hopkins School of Advanced International Studies in his public service to Christina or he gave his institution. Dr Livsky, thank

you so much for joining this morning. John. We are drowning in once in a lifetime events, and you're right is only you can do with your years of Salomon Brothers and such of the new bread basket threat, frame the bread basket threat for all of us well, very very simply the UH. The war in Ukraine is looking like it's going to make a very serious and potentially long lasting disruption and world grain markets. Russia and Ukraine

are major sources of grain exports. Already we can see the effect in UH food and importing, especially low income countries. This is a potentially a serious threat, not in just in the short term, but longer term as well. But right now we've got to deal with the disruptions and food markets, the rise in food prices that are really put strains on many low income importing countries. You gave it a historic speech in Vietnam ages ago which basically

reframe the relationship of communism with the Western world. I want you to give that same speech this morning about what our new fractured globalism looks like. John, what's it

looked like? Well, that's an open question and one that was put pretty starkly by a secretary Treasury Secretary Yelling in the speech last week, in which basically said it's time for countries to line up in terms of their values, especially in the context of the current war, and talked about reframing the world trade system on what she referred to a plural lateral in the words, not necessarily global friends shoring basis, namely, like minded countries politically get together.

And that's a very much a new message from the expansion of the World Trade Organization to a virtually global organization in the past few decades. So this is really an unknown we'll look at a test this week. Tom the G twenty MINS finance ministers and central bankers are set to meet on Wednesday and Thursday, and then the International Monitoring Financial Committee IMFC of the IMF meets on Thursday. We saw Mr by President Biden saying earlier that Russia

should be thrown out of the G twenty. Let's see how these key meetings this week go in these terms, John, what's the calculus right now for I m F officials in terms of how to arrange who to keep in their club as they do shift toward perhaps a pluralistic not globalistic world. Well, Interestingly, organizations like the i m F, the World Bank, and the United Nations are treaty based. In other words, countries that belong. It's not just voluntary.

They've signed a treaty, they have lead obligations. The decisions of these institutions have the force of international law. So for sure, the in the short run, the Russian authorities and others are going to be participating in the meetings this week. How that goes will be very interesting, perhaps more questionable. The G twenty is simply a voluntary group. It's really nineteen countries plus the European Union. Uh, there's

no treaty. Underneath that there's no formal obligation. Let's see if there's a willingness to keep this this institution that was the principal creation institutional result of the global financial crisis. Let's see if there's a willingness to keep it going. John, what are you looking for in terms of how the i m F directs is funding, especially in light of what we started talking about, the bread basket issue, the

potential food shortages. What's the most effective use of I m F funds to combat hunger and some of the inflation that we're seeing in certain nations well, all in the In the response to the COVID to the pandemic, the fund developed some some short term lending facilities, additional ones, especially oriented towards those low income countries most affected by by the strains of the of the pandemic before the fund right now looking towards the longer term strains, the

i m F has now created a new Resilience and Sustainability Trust, which is a facility aimed at providing longer term support for UH for low income countries, for the lowest income countries. This is going to be funded by donations of special drawing rights the i MS so called paper gold that was there was a new distribution last year of six and fifty billion. Much of it went

to the wealthier countries because it's distributed by quota. They're being asked to donate to this new I m F facility, the r s T as it's called for short, that will provide new funding for low income countries. Let's see what happens. To qualify, however, for this funding, countries have to have a traditional fund stabilization program. So it's not just a handout, it's you've got to put policies in

place that will help, that will be sustainable. And John, I want to go back to the American economy long You're going far Away. In a book that's sold twelve copies, you and Jim Glassman a road about and absolutely nailed the labor transformation that was to come from technology. We are now at a point where it is just stunning the need for technology and the technology has and the technology have not. What's the next ten years looked like

in labor and technology? Oh boy, great question, of course, Uh not, there's no obvious right answer. Let me say just one thing in response to the short term situation in the US with wages, the labor sector, wages and inflation. And just a few minutes ago you talked to my friend and colleague, Bill Dudley about what's happening in the prospects for the US So far. What you've seen is

wage gains lag behind UH inflation. And I think one of the important reasons is because so far people still expect inflation is going to come back down to previous to something close to previous rates. If that, if inflation expectations in the general public start to deteriorate, then they're going to have a different view about wages and we're gonna have a different view about inflation in the near term.

Immediate what everybody can see in front of us is the need for for climate for energy shifting energy sources is going to require massive investments in infrastructure and other forms of h of UH capital equipment. Where the funding is going to come from is an open question. It's

not going to be coming primarily from governments. There's going to have to be a major restructuring of capital sources globally from the private from private sectors basically, and this is going to be a discussion of great importance, not just this week in Washington, but on ongoing how to make sure capital markets direct, to direct the investments to their most effective long term use. Deeply, deeply thoughtful stuff. John, As always say thank you John Lipsk, the former I'm

f first Deputy Managing direct. 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