Surveillance: Hawkish Fears with Morgan Stanley's Carpenter

the Bloomberg Terminal, and the Bloomberg Business App. We're gonna bring in a gentleman right now, Seth Carpenter, at least for this Friday, as global chief Economist at Morgan Stanley. He is extinguished. I looked at one of the beauty contests out there. He's sandwiched between Daily of San Francisco and Goldsby of Chicago. Seth, Um, I know I'm going to get the niceties from you here, but let us begin in the Derby to replace BRAINERD and a vice chairman.

Explain to our audience what the vice chairman actually us. So when I was there on staff, it was a really important position. Worked very closely with the chair and the President of the New York Fed, who is the vice chair of the Federal of the Market Committee, and really helps to steer the strategy for policy, not just for the next meeting, but sort of over the course

of the next few quarters. There are schools of thought here, and one of the things that's so important is the politics of Capitol Hill and the basic idea of Main Street, Wall Street and my I even add the academics of Princeton or Jason Furman's Harvard. He's on the list Goolsby Chicago. Have we politicized the FED in the last number of years? Is it different than when you studied at Princeton? Yeah? Uh so, I say the world goes in lots of cycles.

There are very famous episodes back in the late sixtieson into the seventies and the interactions between President Johnson and the FED chair and whether it was appropriate to tighten policy while the US was fighting in Vietnam. So I think there have been uh periods where there's more politicization

their periods where there's a bit less. I think the main thing from my personal experiences that the people inside the FED tend to be very, very focused on what their mandate is and they try to block out the political noise to the degree humanly possible. The mandate being to really bring inflation down to that two percent target, and that mandate is getting harder to wrap your head around right now because we don't understand the contours of inflation.

If J Powell we're having his FED press conference right now, do you think that you had mentioned disinflation as John was mentioning earlier as many times as he did during

that press conference. I had to say, the last data print does make things, you know, a little challenging to read exactly the fundamental story of some disinflation from core goods and some hopefully coming disinflation from housing that's generally in in in still intact, and you never want to fully change your worldview based on one month's worth of data. But there have been some surprises, and it wasn't just one data series. The non farm Perils report for January

was strong, Uh, the CPI report had some surprises. The retail sales report was strong. Um, all of those have to make you wonder, you know, is there a little bit is there more resilience underlying resilience for the US economy. Now, we've had the view for a long time that we'd have a soft landing, that we would not go into recession this year Uh, that view was hard to hold six months ago, three months ago. Even now, I think the market is coming there, and the conversation is shifting.

Are we actually getting a re acceleration instead of a slowdown at all? Can we get inflation back down to two if we don't get a recession? And this, to me is really the underlying question of a lot of what we're discussing, because yes, there is momentum, but this is only increasing the expectations for federate hikes. I mean, I my baseline view is yes, you and have inflation get back down to target without a recession, but it's

a narrow path. It's pretty difficult. You need demand to be reined in so that there isn't consistently and for for continuing several quarters overall demand that exceeds the ability of the economy to produce. Now we know the U. S economy is still somewhat understaffed outside of tech um, and I think it's that residual sort of catchup and hiring that's giving some support to what's going on. But if we can get the economy to slow down fundamentally open up a bit of slack in the labor market

without causing a recession. You know that's possible. Uh, it's tricky to do, but that's exactly what Defense trying to pull off. This If carpont I was reading on Portugal, of all places, in their housing crisis, and it seems like every every every nation has a housing crisis. Are we modeling out housing inflation correctly? Or is it a squashy or changing set of data that we're gonna have to adjud us down the road housing inflation. There's a

very strong sort of philosophical argument here. The way we measure housing inflation in the United States is not on home prices. The BLS is theory, if you will, is that they want to separate out homes as an asset

versus the flow of housing services that you get. And so that's why we have this concept of owners equivalent rent And when the BLS measures housing inflation, they look at quotes on rents and then they tried to ascribe that obviously directly to people who are renting their homes, where they also try to ascribe some of that to people who own their homes. Um, it is what it is at this point. That's the way that how is measured. The U s. I did a completely amateur apples to

apples to onions analysis week. Dr Carpenter and I looked at the rent increases from the pandemic beginning in New York City and approximated the income increases, which are tangible, but it ends up with a plug of a negative twelve and a half percent over three or four years. I mean, does the FED understand the angst all listeners and viewers feel about the housing economy and then what do they do about it? So my sense is yes, the FED does understand that there is a challenge here.

What you've pointed out is that real wage growth has been negative because overall consumer prices have been rising faster than people's income. Now, in general, what that does is it tends to crip people's spending behavior, and we have seen over the past couple of years a notable slowdown in consumer spending growth. Uh So, how does it affect housing directly? Well, what needs to happen is a bit of a pullback for housing specifically. That's usually tied historically

for with increases in total employment. So it's slowing in the labor market will help there. The five dred seventeen thousand non farm barrel print doesn't go in that direction. But there is thing special about this cycle with COVID. We did see a surge in demand for more housing space, people wanting to live alone because they're working from home, people wanting to have more space, and I think there's

part of this shift that was COVID specific. The challenge, of course, is sorting out the cyclical part of inflation in housing, the cyclical part of demand and housing from a strong labor market, from that idiosyncratic COVID driven part of things. I don't think anybody believes that a COVID

cycle is a normal business cycle. We're speaking with Seth Carpenter of Morgan Stanley, the the economist who previously was at the Federal Reserve, who has a long and storied history in this particular sphere, and I'm curious about your process this week, in the past couple of weeks, as we've seen this data come in hotter than expected, causing your team to increase their expectations of terminal rates, to increase how long the FED was going to high rates,

but then also to increase the rate cuts on the back end. Can you talk about the process of how much your view shifted. I think the key right now is trying to figure out how much underlying momentum there is and as a result, how much the Fed needs to raise rates. I think, as far as we can tell now, the FED strategy remains titan policy. Have the economy slowed down enough that you can be very certain that you're going to be on a glide that back

to two percent over a couple of years. Uh, The last several data points have not been consistent with that outcome, and so as a result, more tightening is what's necessary for the Fed strategy. I think the open question, and the part that's very very difficult for us to know, for markets to know generally, and for the Federal Reserve

to know, is just how far is enough? And part of that is how much was the five seventeen thousand jobs a one off like it was in July of last year, and how much of it is an indication of underlying strength? Inherently difficult. How much of the strength in January's data for retail sales, for non farm pay rolls, for inflation was because of changing seasonal adjustment. That's gonna come out later in the year because seasonal adjustment has to be zero sum over the course of a year.

Very hard to know right now. Um. And so that's what we've done, is we've said, with the data available now, and then if we go to the March meeting, what data will the FED have available? It'll be clear things are stronger than they thought, So they'll hike more than we get to the main meeting. What information will be available to the FED? Then another month or so worth of extra data they have to take data, not one month changing their view, but on the sort of accumulated

history of data. And by the time we get to May, it's not it's good. It's very hard to see why they would have concluded. And everything is hunky dorry at that part. And so that's why we put in those extra hikes. What would lead to even more hikes? What would lead to for example, yesterday Lauretta Mester talking about

fifty basis points being on the table. I think, if we get your evidence that January's data, we're not an anomaly, but we're a shift in inflection higher we get another four hundred thousand non farm barrels, for example, I think they have to be talking about the fifty basis point hike. So that's just real quick here twenty seconds. Do you think that this all takes us further away from a soft landing. It's a mixed bag. I'll say no for now.

It's hard to say that a stronger economy results in a weaker economy that doesn't sort of follow on its own. The tricky part is the FED has to react if it's a substantially stronger economy, and it's always been difficult to gauge how much to tighten. So it's a bit of a mixed bag. Maybe at the margin greater chance of a hard landing, but for now we're happy to stick with our soft landing story. Dr Carpenter, thank you so much, Seth Carpenter, at least for now. With Morgan Stanley,

thank you so much. What we're gonna do here is dive into the politics of the moment. There's eight ways to go. Always with Professor Schiller Wendy Schiller's directing Tubbin Center for American Politics and Policy at Brown University or textbook definitive Wendy, I want to go back to Ronald Reagan, and I can remember clear when the FDR Democrat became

a Republican and changed how primaries were on. There was a moment I think it was in a nineteen I think eight, nineteen seventy eight, whatever, nineteen seventy six where he was pushed aside because he was too conservative, and he figured out, you run conservative and moved to the middle. Along the election trail that seems to be absolutely blown up is the governor of South Carolina jumps into the race.

As we see Paul John help me hear the poll for Trump overnight couldn't be Yeah, yeah, the Quentin piach Pole the leader, and right behind him is Rhonda Santis. The leaderships, it seems like when it's all blown not How are the primaries different this year versus what we knew with Ronald Reagan. Um, we don't have time for the entire explanation. Tom. As always, you ask a very broad question a couple of things. Ronald Reagan understood that you could gain steam in a primary, and you're right.

In nineteen seventy six, he challenged an incumbent Republican and he didn't win the nomination to a typical and Republican party typically to have sort of I lost last time, so on the nominee next time, up until Donald Trump. Uh, and then the Democrats changed their primary system in four and eighty eight. They kept sort of changing the rules

about how delegates were allocated. What we're waiting for is key how the Republican structure their primary season for twenty four makes a big difference to Ron De Santis and Donald Trump. We've seen the Democrats move their calendar. Obviously, South Carolina is a big primary, big primary and a big priority now for the Democrats. What will the Republicans do?

And when I'm talking about is how they divide up their delegates in the beginning, proportional representation which kept Trump a lot of actually in the early primaries in sixteen, or winner take all, which would help Trump. Also because Trump is now a known commodity, has got a built in base, and if it's plurality, he'll he'll start winning

those early primaries. And that presents a challenge if you think for Ronda Santis, even though he's got Florida, that's gonna be And we haven't heard yet what the r NC will do with how where they're gonna make any changes or keep things stas quo Wendy. A lot of people are talking about how much time, And I say a lot of people. I'm saying the two people next to me are talking about how much time it takes

for the election process to be carried out. And I'm wondering how much room is there to change the gravitational force and the Republican Party away from Trump towards Ronda Santis perhaps a bit more, but also potentially to Nicki Haley. Well, the only way it gravitationally pulls towards Ronda Santis if it's Wanda Santa's declares and starts running. I think the mistake that he might make is to wait too long.

Now you have Florida in your back pocket, you get a lot of free publicity, but it doesn't mean you're you're out there really connecting with primary voters. And that's what the Santis has to do earlier than I think he's comfortable with UH And then Nikki Hall is going to be out there. Tim Scott from South Carolina, he's a senator, he may get in the race as well.

I think the idea is the more people can present alternatives positively, not beat up on Trump, not attack Trump, but positive alternatives without all the baggage they're hoping they can start to pick up some steam among rank and file primary voters. On the Democratic side, we have President Biden trying to deal with both domestic and also international issues, and the latest news on that front is that he is thinking about some sort of phone call with a

Chinese premiere with with paying the president of China. How much does this give him a bit of a difficult position to put out there, trying to both dovetail a hawkish message with a sort of a sort of olive branch to the Chinese leadership to try to smooth over some of those relations. Yeah, I mean, I think that he's handling this in the way that he handles on everything.

He's sort of marched into his own tune. He's got a lot of foreign policy experience, and China is an extremely important not telling you three something you don't know, a very important economic partner. And he's been moderate in his response to this because, you know, picking a fight with Russia and China at the same time, particularly China economically.

We just got out of that with tariffs and you know, they stopped buying our soybeans that cost us a lot of tax by our dollars and subsidies back to farmers. You know, there's a lot of very negative consequences to picking up big fight with China GEO, politically and economically, and he's not falling for it. He's deciding I'm gonna take this slowly, one day at a time, and I'm not going to jeopardize what seems to be a renewed

and healthier relationship than under the Trump administration. When the underreported is the four base agreement between the Philippines and the United States, I'm gonna say two weeks ago where we're gonna expand out there with investment in for some form of military bases in Luzon in the South China. See. How important is that? What does that signal to the Navy and to China, Well, it's extremely important. As you know, China has been making incursions in this China see for

quite some time, obviously rattling their saber. When it comes to Taiwan. Uh, just understanding that the United States will maintain its military presence and that it will be prepared in some way, shape or form to block any of what they consider overreach by the Chinese military. And then you threat to Taiwan. So I think it's a it's

you know, it's a traditional move. We've been affiliate with the Philippines for very long time, and some people would object to the nature of that relationship in its early days. But nonetheless they have to show the military United States and the President that we are going to engage some way, shape or form, not to give China a freehand. When do we have this Munich security comfort zone going open Germany,

what do you expect to come out of that? Well, I mean, I think you know, the whole question of the Ukraine Russian conflx, how much how much weaponry we are giving to Ukraine. We've seen this in the past where we give a lot of weapons and then we lose and then the enemy gets our weapons, whether they're destroyed or not. Uh. And it's it's a delicate balance. And then you've got Finland saying, listen, when are we getting into NATO. You want to expand NATO, We want

to be a part of NATO. Let us in already. So I think there's a lot of complications going on, and I think, you know, Trump took advantage of this in terms of our NATO partners and saying you have to do more and I think President Biden is doing a lot with weaponry, but you have to make sure Europe's in UH and continues to stay in and think it's politically very important to President Biden and by Europe. Ready, Way main gairmany time. Way, Wendy, thank you and so

alwa it's Wendy ship of that brand university. Wendy just wonderful. We're gonna do something different with Helene Becker. We're not going to get a single best buy in an individual stock. We're not going to complain to her about the cost to Paris or the like Placid this weekend for Lisa. What we're gonna do is talk to her about the unspeakable. When you're Helene Becker at Cow and you can write about it, you can think about it, you can experience.

I cut to the chase Helene Becker. When I was in school a long time ago, a friend of a girlfriend's family was a PanAm pilot and he walked on water. There was a time where these people were gods of the airspace. Maybe it touches to the DiCaprio movie Catch Me If you can. Things have changed? Do you have confidence in the pilot training, the pilots coming up from the regionals. Are they the same as that god from fifty years ago? Um? So this are two questions Tom.

The first part of the question is do we have confidence in the safety and and and security of our er any of our air traffic UM system. Yes we do. UM. The pilots of fifty years ago we're trained during wars. We don't have that much anymore. So pilots now are more civilian trained. But yes, they all have this fift hours of experience before they can work for commercial airline UM. Unless they're in the military, they can have a few few fewer hours. UM. But yes, it's gotten increasingly difficult

to be a pilot because of concerns about safety. I look alaim at the financial part of it, of recruiting pilots, described the pilots shortage and the reports recently that the major carriers are basically stealing pilots from the lesser regional carriers. Yeah, they're eating their young. UM. So here's the situation. And we've been talking about this since two thousand fourteen, but

the pandemic accelerated it. Um. You have a group of pilots beginning in about twenty seven thousand pilots are going to turn sixty five this decade. So when you think about that, the US airline industry employs about fifty seven thousand, sixty thousand pilots, so more than half or about what of pilots were retiring and they have to be replaced. UM in the US only trains collectively about five or six thousand pilots a year, so you were going to

have a shortage anyway. Then you had the pandemic, and airlines asked pilots who were intending to retire between two to consider retiring in and UM. The only airline that really didn't do that was United. They made different arrangements

with their with their pilots, but others retired. And then when things started to recover, not only did you have to hire back the ten thousand that retire, but when you think about growth, and you need roughly five or six thousand pilots a year collectively for all airlines, UM, you were hiring fourteen or fifteen thousand pilots in two in an environment where you're only training a third of that.

So we were going to have a shortage. And I'm sorry, go ahead of hell and this all boils down to this question of consumer experience and how much of this is what's behind this shortage compere a city relative to demand and an experience that I mean, I can't blame this and why a plane turns around, but a feeling that things are kind of running more by a shoestring

than they used to. How much well consumers put up with given that this is a catastrophic experience for somebody who's on that flight, But if they want to leave New Zealand and go to UH somewhere else, they're going to get back on a plane. Right. So, UM, I think the incident you're talking about was the one yesterday where there was a fire at JFK and UH and Air New Zealand aircraft turned around halfway into the flight or something like that. Yeah, So here's the thing you

want to travel as a consumer. Um, you've missed it. Maybe you haven't traveled that much in the last couple of years, and you want to get back and you want to get back to experiences and doing things, and air is part and and maybe air is part of your vacation, and so you try to figure out the best way to do that. UM, traveling days of week that are maybe less popular, like Tuesday wins to Saturday day. They're a little less popular than the other four days

of the week. Um. And then the other part of it is for the consumer, we're seeing a lot of buy up from main cabin to premium economy UM or business class, but those fares are starting to go up a lot, so we'll see whether that last. Just a note from me, I'm not flying on a Tuesday. I'm just not doing that. If you take the week off, I'm leaving on Friday night flying on a Tuesday, It's not happening. I need to clarify something I said a little bit earlier. I read you a statement from an airline.

It was actually from Korean Airlines because there were two flights that had to make a U turn. Can you believe that? Can you believe that? So that was that was the statement from Korean Airlines. Let me share the statement from their New Zealand with you and Helen, can you help us understand this a little bit more? They said, diverting to another US poor would have meant the aircraft would remain on the ground for several days, impacting a

number of other scheduled services and customers. How messy can that get? Yeah? So okay, So what happens in this case is pilots UM and fly to tendants have duty our limitations and on a flight as long as the ones we're talking about these over the Pacific fifteen hour flights, you you usually fly with two crews, right, You fly with your pilots who are flying the plane, and then about halfway through, once they reach their limit, you switch

out cruise. And there are different ways of doing that anyway, So the point here is if you divert to another aircraft airport, UM, now your duty day is over regardless of where you are, and now everybody has to rest for their minimum rest period and then you have to get back you know, in the aircraft. But meanwhile the aircraft is out of place because you can't just willy

nilly pick an airport, or you don't want to. You want to pick an airport where you have services, where you you have UM a gate, where you have UM a ticket counter that can help the people on the aircraft get back UM get to where they're eventually going. And then you have all the people who are intending to go back to Auckland trapped in New York in this case, so you have to have a plane there anyway.

And I want to finish on this given the nature of the conversation we've just had for five minutes about this industry. American Airlines is up twenty year today, United's up thirty, doubt US up sixteen and a half. I know over the last twelve months have had difficulties, but these stocks have runned so hard here today. Why right, Yeah, So what Lisa and I were just talking about, in terms of demands, very very strong supply is limited UM there O E M. Not only air frame delays from

Boeing and Airbus, but you have UM engine delays. You have maintenance issues parts that we're turning around in forty eight hours or taking weeks now, so aircraft are on the ground. To have all these supply constraints, you have a lot of demand still and you have very strong pricing and fuel costs have come off their highs. So from a margin perspective, we're actually looking at at least

a very good first half of the year. Whether it carries through all year, we'll see, but we definitely think first half is going to be very good and that's propelling the stocks, good for them and bad for us as we all just have to suck it up. Apparently, Helene, thank you as always telling back to there of canon, you're gonna bring in Robert, I hope. So unless you want to talk about Dare again, No, I don't want Bob donods Cio cross Mark Globe and Investments. Bob, We've

asked this question already this morning. But given the pullback in equity market, so the running we've had so far this year, what do you make of this most recent move? Is that something you want to take the other side of For starters, you guys are having way too much fun over there for a Friday morning that aside. Look, the bulls have had the year to date run um. I think it's gonna be a year where we frustrate both the bulls and the bears. Now it's time for

the bulls to be frustrated. Look, the narrative has been maybe the Feds almost done, inflations coming down. I think we'll have a soft landing. I better buy some stocks. But what that ignores is we have the most inverted yield curve in forty years. The l eyes have rolled over sentiment. Retail sentiments move straight up to equal to the peak of a year ago. Money growth is negative. The impact of what the Fed did last year's yet

to be felt on the economy. I think the markets ahead of itself and we're gonna give a lot of this back. Bob Doll. I talked to Andrew Slimmon of Morgan Stanley yesterday and he was absolutely brilliant. It was a clinic on what you and I remember, which is an actually normal rate environment. And what Andrew was talking about is was everybody understand markets are looking forward and expecting out to the future. What's the Bob Dolph future

look like? That gives me comfort in owning stocks. Well, I think for starters, we've got to get through this period of economic weakness. I'm going to call it a mild recession. I know that's not popular. It was fourth quarter last year, but now the soft landing school has taken over. I don't know how you ignore the list I just put on the table. We've got to get through that. And during that time frame, Tom Earning's estiments are gonna come down somewhere. They come down a lot. Already.

Stocks have a hard time moving significantly higher when earning's estimates are coming down. So I think some caution here makes sense. Bob Torsten Slock has been out front talking about a no landing situation, and he just put out this giving a sense of what the market response would be to such a scenario. Basically, high inflation is a problem. The Fed is not done raising rates, which means that the trading environment from two will be coming back and

the portfolio will perform poorly. Do you agree? I do, sadly. I wish I could answer differently, but I think the uh, the inflation. Inflation takes a long time to get out of the system, and to think that it just peaked and is going to come straight down. Look, if the Fed really wants to percent inflation, they have massive amounts of work in front of them. Can we get down to four maybe into the threes? Yeah, but nowhere close

to two? Bob, real quick here? Then what does that mean for ten year treasury yields considering that they have been creeping higher after a huge flood of cash into longer duration for the first month of the year. Yeah, I think that those rates have moved up appropriately. I couldn't believe how low they got. I suspect they'll stay where they are, maybe move a bit higher before we see the eyes of a mild recession and some more

lower inflation numbers in flash and sticky. You guys know that you've talked about it, so you want to wind. So I want to have a little that four and a half percent cash in my portfolio. I don't mind so much a nearly four percent ten year treasury yield. And in the stock market, I want to own a lot of the things that have not done well year to day. Which are the things that did do well last year, Companies with earnings, reasonable valuations, good cash flow.

The leadership has been the stocks companies that lose money last year, UM stocks that are heavily shorted. That's not quality leadership in my view. I bopp Grist, have you on the program. Thanks for being with us. Put all that across montol even investments. Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday starting at seven am Easter. I'm Bloomberg dot Com, the I Heart Radio app tune In,

and the Bloomberg Business app. You can watch US Live. I'm Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keane and this is Bloomberg