Surveillance: I Don't Think Inflation Is Dead, Hatzius Says

take well. I think if you look at where we are, you know clearly the FED had a tremendous effect on emerging markets last year, on markets and on the economy, and as a result, we feel the Fed as patient or on hold this year. Uh So, no question about it, and we think that's positive for markets, but largely priced in at this point. We're over to the fundamentals, psycho

and how constructive value on those two things. Well, for us, it's those two things right and improving economy after Q one is going to be weak we think one point six percent, but we're average about two and a quarter the rest of the year. Uh and then earnings have to improve. John and I have mentioned this a number of times. Let's do a victory lamp on this again. I'm not picking the bottom of the market. Pharaoh was

smart enough to do that. He used the games that he got there to buy his eight thousand lift shares that have tanked. But I wasn't smart enough to do it. If I just sort of randomly late December picked a spot off of Ben Laidler's recommendation and Jose Rascoe's recommendation. John, I'm up eighteen percent. I mean that's that's not only a year's performance, that's a bowl market. Now what what are the what are the optimists that have been so right?

What's the now what for you? And now? What is volatility? Balls cheap? We we are concerned things are priced to perfection, and we think we're going to see more volatility as we head into a Q two in fit in the face of an improving economy, so because we think there's gonna be a lot of noise out there. So as a result, as earnings improve, more vol and we could see a bit of a retrenchment in the markets. But longer term we still think a little bit deeper here

the catalysts for higher volatility. The u S data has been remarkably staple. I mean, I think it's a Deutsche Bank coming out with all the two's two percent inflation, two percent GDP growth, It has been remarkably staple. So walk me through what you think the catalysts for volatility would ultimately be. I think some of it will be earnings.

On the earning side, We're gonna see some difficulty and we've seen, but we think we'll see upward revisions to earnings and that will be part of the adjustment we have as we go forward. The big ones we think will be political on the trade front, in particular. You do private bank, which means I need some coupon? Is coupon of any value right now? Are there fixed income of any value? Absolutely? Are you know, high net worth

individuals are still looking for that that return, that yield. Absolutely, but they're looking for growth. And what we're seeing increasingly is clients are saying, you know, I'm seeing the market is up. What what do I do? How do I care? But is a dividend of proxy for yield? I and my all my radar goes up when I say that. Yeah, yeah, well, I think look, we've we've had some investors do it but you have to be really careful obviously with a dividend deal strategy. So where do you put fixed income

for hitters right now? I mean, was it full faith and credit? Are you going out and find something goofy esoteric? Well, we're out in EM debt. We like EM debt. We like EM hard currency debt in particular. We've taken our winnings from from high yield. We still like high yield a bit, but but it did really well in the first couple of huge exactly. So we took our victory lap there as you just mentioned, and we're gonna sit

back and we still like it, but not as much. Yeah, but now we're more and more focused on investment grade with this other pole being emerging market. So somebody walks on the door and they've got fifteen percent of their portfolio on Amazon because it used to be three, exactly, and it's not what come on, you're telling me to sell Amazon or Apple or Microsoft to the rest of these you know, linear moonshots that are out there. You know,

we think back to two thousand one. The biggest problem we had in the market, the correction in the market in two thousand one was people allowed their portfolio to get out of whack. They did not redistribute profits, and that was a big part of the people rebalanced were looking out of the studio. Not weekly, but no, we have quarterly meetings with clients. Monthly meetings with clients, uh, to talk about rebalancing portfolios, especially with the volatility we

see increasing going forward. What did I miss if I rebalanced Amazon just as you know, or Microsoft pick Microsoft in the last couple of months, years whatever in the last rebalanced Microsoft. Well, I mean, look, hindsight is twenty if if I right, And that's the thing with with you know, if you're gonna, if you're gonna do portfolio management, hindsight is twenty. But uh, you know, so put it all on one stock doesn't make a lot of sense. So I think we want to make sure that that

earning stream is solid for for investors going forward. They thank you so much. Can we get to three of you, you, Ben Laidler and Steve Major all on the set at the same time, or even who's who's the nutcase in for David? David Bloom to a guest is another The problem with Bloom is all he wants to do is talk English football. But where where's Bloom on for an exchange? Right? Interesting? I'm surprised you didn't mention the interesting qual with Stephen Major.

You know what our qualit is on the tenure right two point? Yeah, you're still one dollar stability or even dollar strength. Right. Well, that's the problem is we're not looking for dollar strength. But to Bloom's point, and and you know, how do you see dollar weakness in an environment where everybody else is cutting? So congratulations to your back. You guys have been on fire. Thank you, HSBC Private.

Should you welcome our next guest? Well, I'm going to take the welcome here because it doesn't look to impress with you. It's government's next chief economists and head of global economics and markets research. Yeah, and great to see you have anything to say to Tom after that? It's great to be here. And the trendier reception has always

appreciated good. But seriously, to Jeff, how did you take Jeff curies working folded into what we're seeing and we were all at ourselves into pulled up the Business Week magazine article from Mr Hatzies. Dr Hatzi is here is inflation dead? Comment on there? Please? I don't think inflation

is dead. But obviously we're in a very different regime from where we were in the nineteen nineteen eighties and nineteen nineties, and I think that's still a gradual adjustment of forecasters, you know, the idea that we're going to be, you know, not even with a three percent unemployment rate, not necessarily at two and a half percent plus on inflation is still something that that is taking a while

to sink in. Now. Beyond that regime change, I think we've also seen some kind of more genuine downside surprises and some of the h inflation indicator US recently so or um. You know, if you'd asked me three, three or six months ago, I would have said late this year, we'd we'd be you know, maybe two and two and a quarter per sandals or for core pc inflation. And now it looks like that's not going to happen. Thank you so much, Thank you always. Let's bring it Dantan

about shall we? P WC United States Principal and Global Sanctions Leader, Dan Let's begin with what happened yesterday, the concept of waivers for Irani and crude exports, and what's going to change in the next couple of weeks time. I think I'm going to the wrong parties, so no one's talking about sanctions where I go, or maybe you're

going to the right party. That's fair. The announcement shouldn't really surprise anyone because the government has been telegraphing for the last few months that there weren't going to extend the waivers. The unpredictability they've been exhibiting over the last couple of years has made people skeptical that they would follow through. But the announcement came out. They want the

world to go to zero on Iranian crude. The Iranians have respectfully disagreed, as well as a number of allies that still continue to trade, and so we're gonna have a bit of a standoff potentially. How quickly can you get to zero? I mean they waivers are due to expire on May second, so next week. I think it's very unlikely that anyone is going to zero by the end of next week. They have an Ahwah's oil field and Smari formation. They pump oil, it's put in barrels

or whatever, or on boats. How do you actually sanction it? So I mean it is like you know, the confederacy where you put boats around our harbor. Well, I mean what they do with some of those boats. The whole fleet of ghost tankers that essentially are filled with oil and floating in the water, is floating supply depots because they just need to store the barrels somewhere. The sanctioning will come not necessarily against the Iranians, but against companies

that are found to continue to trade in Iran. So if you're a bank that had financed the legal Iranian oil trade, you could potentially be at risk after the waivers. Just because Dan, this is so important folding China into this, because one of these nations is China, and yet we're trying to be happy, touchy feely with China right now, right This won't help, This won't help, thank you. I mean,

maybe we look at is this compartmentalization. They don't write, they don't and this is going to get roped into the broader trade debate that's been ongoing. And I know ambassad Lightheiser's due to be on another delegation to Beijing. This will certainly be part of that agenda. But the Chinese do not compartmentalize like the U S. You're trying

to on this issue. Every now and again we hear threats of shutting down the straight off Homus, which separates the Persian Gulf and the Gulf into the Arabian Say, which I think around about scent of global oil flows through. We hear those threats again in the last twenty four hours.

How seriously should we take the prospect of Iran trying to shut down the Straight of almost I think that's an unlikely scenario that they're going to shut down that straight There's other countries that are allies to Iran, that are actually allies to the US, that would all potentially have an adverse reaction to that, and all that would be harmed, mostly the Iranians as a result of that, because other countries could come and punish them similarly, How

harmed are they if we go to quote unquote zero, So you know, the as I understand it, oil makes up about of the Iranian economy. It would be a significant harm to the government and to the country of Iran if oil goes to zero. There are a number of trading partners, like India, like China that have no interest in suspending activity in trading in Iranian oil. Now.

Of the eight countries that got waivers, Greece, Italy and Taiwan have already suspended, but that leaves five countries still in the mix, and two of them have large volumes. Is there a black market? I don't want to get in trouble with p WC, but the you know, forget about the visible market. Is there a black market where

the people that desire Iranian oil get it? I don't think it's so much a black market, but a shifting of transactions out of US dollar denominated transactions and move them to the Euro to attempt to keep them entirely away from U S jurisdiction. That's been floated for years in response to the Iran related sanctions. The dollar is obviously a much more stable currency, that's why it's been

pegged for oil. But that's always a scenario. And there's also mechanisms that the EU have set up, for example, to allow humanitarian trade to be processed called instincts, and that is a mechanism that is technically legal, even in the eyes of the U S, to facilitate humanitarian aid, but it goes outside the traditional banking sector. Down great

to catch out with you busy twenty four hours. Again for you, I'm sure and no doubt down we'll be bank with us as we canty it down to the prospect of the wave is being removed and potentially an effort to send Irani and crude exports down to zero. Lindsay p X joins us right now with Staple, their chief economists. Lindsay, good morning. What part of why will C plus I plus G plus n X matters to you?

What will you look at first in the GDP report? Oh, I think everyone will be focusing on the sea the consumer, how healthy the consumer is as a one of the largest components, the largest component of the growth equation. It really depends on whether or not the consumer is happy and healthy out in the marketplace doing what they do best, which is spending on discretionary goods, new big screen TVs

and new spring dresses. So we really need to look at how much the consumer is spending and whether or not they're able to maintain that spending trend going forward into the remaining quarters. Well, what does your work what's your forecast on that? I don't mean a single digit number, but but what what's the what's the Lindsay vector of consumption, Well, I think the consumer is still spending. That's the good news.

The glass half empty, however, is that the consumers spending at a noticeably reduced pace to what we saw in For a number of reasons. There were a couple of very temporary but strong factors helping to prop up the consumer over the past couple of years, ramping up credit to above pre crisis levels, drawing down savings even that lingering wealth effects that consumers had accumulated from filling up

their car lower cost. What about the tax plan? Come on, come on, everybody got hit over the head on taxes. Did that have a lot to do with this? Well, taxes did play a role here, but a lot of

that boost for the consumer or was already spent. If you look at the consumption numbers, specifically the discretionary spending numbers, which we look at for the retail sales figures, consumers actually went and spent well above trend at the end of seen But nothing had happened in terms of taxes in seventeen, but consumers were more than willing to spend in anticipation of tax reform coming down the pipeline. But what we actually saw is when we turned the page

into the expectations of tax reform. In terms of our after tax take home pay, we're well above reality, and consumers actually had to pull back, so we overspent, we intenipated more in terms of return, and then we reverted right back to the trend pace of expenditure for the latter part of eighteen and now we're starting to see that more downward bias in many people expected this first quarter to be soft. It's not actually as soft as I think some people would have thought it might have been.

Going into January. Looking out and extrapolating this forward, lindsay, is this what the rest of the looks like? Something in the low twos. Is that what you're looking for? Well, I think actually we are going to see an annual paste below two percent. We're looking for an annual range of one and a half to one point eight percent, so still not terrible, right up near that two ish percent mark. But what we're seeing is this very clear

decline in momentum from a top line perspective number. Four percent growth in the second quarters, three percent in the third, two percent by the end of the year. We're clearly seeing this this ladder cap down in terms of top line growth. Do you expect that to continue this year? I believe that's a linear vector four three to one

blast off. Are you willing to predict blast off or are you going to get on the recession crew of Well, I do think that we see the first negative print by now, whether or not we fall into recession, we're kind of splitting hairs there. Of course, recession is typically back to back quarters of negative growth. And whether or not we see that dip in the first quarter, in

third quarter, or some sort of combination. Are we do expect the economy to fall below zero in and whether or not again we maintain that consistency of negative growth, or more concerning lee we fall into a non accelerating growth platform, in meaning GDP falls consistently below one percent. I do think that we see the economy decelerate noticeably over the coming twelve to twenty four months. So is that accompanied by federals of right cuts? Is that in

your base cases? Well, lindsay yes, we do think that the FED is going to acknowledge that the growing level of weakness. Now they've already acknowledged the fact that the data is not necessarily sending a clear signal to the

upside or the downside. So the Fed this time around seems to be willing to make policy a bit more preemptively, and as they anticipate that decline and momentum going into we do think they're going to set the stage for the market, giving ample time and notification that they're willing to move into a defensive policy position, and we get that first rate cut in the first quarter of Lizzie. Thank you so much, Chief Economists. Thanks for listening to

the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.