Surveillance: Inflation Concerns with Reinhart (Podcast)

and of course on the Bloomberg Terminal. Inflation is still hot, and so it becomes a question of do we believe that the fete is going to stay firm and it's resolved to fight those price pressures instead of reacting to weak data. The equity market telling you in the last couple of days there will be weakness in their resolve. Will there though, Is this a vulcar Esque pal or not? Joining us now to try and answer some of that is Vince Ryan Hot, chief economist that dry us and

Melod Vince, let's start here. This market believes we're saying the first steps potentially towards defen pivot. Do you agree. Not particularly central to this is the view that there will be this immaculate disinflation. Yes, the news might be in a touch worse than expecting this morning, but we believe the FED inflation will have over the next year, and that will allow them to pivot. Inflation just doesn't come down that way. So, Vince, which is it? Is

the economy doing really well or is it not? In other words, I'm trying to parse out the equity move. Some people are accusing me of just being parish no matter what, which maybe you can, you know, accuse me of whatever you want. But if the economy is weakening, we have a FED that is willing to potentially curtail that if they continue with their rate hikes. Do you think that they are going to cause a recession by design?

As j Pala seemed to be sort of not suggesting but hinting that there was a risk if you believe j pal that inflation is the number one concern of the Federal Reserve. Now they've elevated that in the dual mandate. Uh, woke up this morning. Inflation is a problem. Inflation is still a problem. Therefore, he's got a slow aggregate demand and hope that aggregate supply fills in the way you

slow aggregate demand is tighten financial conditions. Uh, we don't have slow enough aggregate demand, yet it doesn't seem to be slowing enough. And trained and we got mixed evidence that aggregate supplies filling in, so he needs tighter financial conditions. What data is the Federals are going to be looking at in their data dependency. I think the answer is

always all of it. Uh that in particular, he brought back his stars in his press conference over on Wednesday, I e. The FED look has basically set central guide posts, but there are only estimated. They're approximated, and a big one is inflation and inflation expectations. That's why you in your viewers should be looking forward to the University of Michigan survey. Uh. That's why they care about what's happening in bond markets right now, because that tells them what

inflation compensation is uh. Right now inflation job number one. So everything that goes into the space to predict inflation is what's important. Commodity prices, inflation expectations, exchange value of the dollar. Where do you think inflation realistically can get down to you by the end of the year. But it's what's the figure? Uh, Not as much as the FED hopes, and much less. In twenty twenty three, I think that uh, we'll get a modest upticking the unemployment rate.

Demand really is going to be slowly and inflation is going to be off off of percentage point and a half or even two talking about the PC index, So we're in the high fives. FED is forecasting not atlantish. For two. It's going to be more persistent next year because we have so much inertia. We saw it this morning with with that uh the e c I. Uh, the e c I wasn't as much looking forward to future inflation. It was trying to catch up to pass

erosion to purchasing power. Okay, So given all of that, stickier higher inflation than the FED really realistically wants it to be. That would indicate that the FED is not going to be able to blink even if the data deteriorates. And yet that is fully what this market expects. And Vince, you said a moment ago they need financial conditions to tighten. That's not what they've gotten in recent days. How aggressive do you expect the pushback to be over the coming weeks.

I think they're gonna have to push back, to be honest, I was a little disappointed and share Pal on Wednesday he was he seemed to be accepting of where markets were right there, right, right then and there, he said. Essentially the some real economic projections is still appropriate both in terms of their forecast for the policy rate and the macro outcomes to optimistic on inflation. Essentially, right now markets believe the ends to what the FED wants lower inflation.

They don't quite have it right about what the means will be. The means will be tighter financial conditions. Uh, if you tightened basis points and financial conditions are easier, something went wrong and you're gonna have to push back, Vincent just quickly here from your perspective, how much would inflation have to come down for the Fed to truly pivot? I think at that point, UH is going to be important about the other part of the dual mandate, where's

the unemployment rate. If inflation has come down a lot, it probably means the unemployment rate is going up. As inflation gets closer to their goal, they can put more weight to their other goal, maximum employ him. It unemployment rate starts rising, they will pivot. In our forecast, we think the pit the FED declares victory a little earlier. Remember Paul Boker did too. If inflation is notably lower in three I e. Still in the three but maybe

not at goal. The FED will connect dots that says it was lower now than it was six months ago than six months before that. We're headed in the right direction. Now is the time to worry about activity. However, you don't get the slowness of activity. You don't get that decline and inflation unless you get tighter front nancial conditions. Now. Vince run Hunt drive us amount of Vince a clinic from US. Oh White, thank you said, a lot of

people have been talking about complacency, and thank you John. Honestly, we're still seeing that rally continue and we're still seeing a lot of short positions come out and we are poised for the biggest rally going back to of our twenty in the S and P. Some people who last year we're talking about how there was a faulty call in transitory or included among them Barbara and Bernard. She came out and she was saying, this is not the case.

It's stickier, it's more protracted. You need to plan as such. She is founder. She is chief executive officer and chief investment officer of Windcrest Capital. Joining us right now from the Bahamas. Barbara and can you just talk about what you make of this rally that we've seen so far in July, which might be the biggest going back to

November of Thanks for the opportunity, Lisa. Yeah. I think this is a bear market rally for sure, and it's based on hope, not on free cash flow, not on the free cash flow of the consumer, and not on the free cash flow of the corporate when you have we're looking at as negative real wage growth, which is why we have the lowest consumer confidence in forty years. And what businesses are facing is the highest PPI grates in forty five years, which is why small business confidence

is at an altime I'm low. So these businesses are facing very little visibility over demand for their goods and the cost to produce them, which is not a healthy situation. And meanwhile, the market is rallying on, like we said, hope, not free cash flow. So I don't think it's sustainable unfortunately, Barbara. And let's go to the phrase that John Farrow hates the most, which is bad news is good news, which is what Jonathan Galab was talking about in his note today.

That's what it's become that the more people start to talk pessimistically the way that you do. They talk about possibly some sort of pivot from the FED. Why is this not the right way to look at it since it has been the right way to look at it for the past few decades. Well, let's just break that down. Is bad news ever really good news? What you're talking about is the FED what will not raise rates? So we're talking about MULTIPLE expansion, not EPs expansion, and a

healthy economy is based on EPs expansion. So yes, you don't want to fight the FED, but we also want a healthy economy, don't we. Well, in theory, Barbrand, I would assume so. But on the subject of the FED and how they would likely view what we have seen in the equity market a rally, financial conditions getting easier and not tighter. At what point will they have to push back on this? Well, I feel like they induced

this rally right. It was the most confusing. Either I was on the wrong call or misunderstood the market, But what I heard was there's no more guidance. People retired of being wrong the number and the number one our goal is to bring down inflation for a soft landing. But number two, we understand that's challenging and it's got more challenging in the recent months. None of that's positive to me. And then I think the real error was calling to and a quarter to two and a half

a neutral rate. In my economics techt books, that's not the case, particularly not when inflations at nine percent. So that is very stimulative and accommodative, and that's what's fueling um you know, these forces. At the same time he's trying to squash So he also said the dot plot is the best indicator. Well, what does the dot plot say that we have a hundred basis points of more

increases this year in fifty next year. So rates are still rising and we have consumer and business confidence falling. We've never raised rates into falling confidence. And the other really interesting experiment is we've never raised rates when the US FED debt to GDP ratios are so high. So if we do induce a recession, the real risk out there is now you have lower tax receipts and higher

interest expense, which is also not a pretty picture. So I'm this is not easy, and I think as an active manager, what you want to do is really stay nimble and humble, because we're now told were focus on data, which is going to be much more volatile. Well, of course Chairman Palace said they need to be humble as well. As you're doing that. As you're being nimble and humble, what does that mean you want to buy in the environment you're describing, which, as you say, we've never been

in before. In theory, higher rates mean you don't necessarily want to be owning oath and yet if the economy is slowing, maybe you want that cash flow. So what do you do? It's a great question. So we actually are a net short and we have a mountain of cash to buy great opportunities when we see them, we don't think we're there yet. Um, we have initiated too long new long positions all year and so the barrier to entry to get into our fund right now is

so high. So what does an attractive opportunity look at. We're talking about companies that are trading for the cash on their balance sheet when we're getting the operating business for free. So that kind of upside downside skew is the margin of safety I'm willing to take. Otherwise we've been generating tremendous ALFA on the short side. I think we have thirty six. Actually, I know we have thirty seven individual short positions. And this is a real stock

pickers market. You would be very happy if you were long Amazon and not Walmart this week, right, that's a stock picker's choice. So being tethered to an index that I think is further downside is where I see the real risk. By brand. Do you see a lot more potholes the ones that we have seen in specific names and I'm thinking of some of the darlings of the pandemic era. Do you see more of that coming or is this just an ongoing bleed that the short positions

will capture. No. Absolutely, I mean, at least if you think about this in a rising rate environment, it's crushing a whole cohort of companies whose business model was built on free money, and so all of that speculative has to drain the small and so you're looking at companies that are over levered. You know, we're counting on free money, um and and and they're they're really gonna be in trouble.

So we haven't seen the zombies fully deflayed yet. And then you're also looking at companies in the pandemic era that took on a ton of debt. You know, you just look at someone like Carnival Cruises who's just did a billion dollar equity raise and still has six times net debt to EBITDA And if you go by what Royal Caribbean said this week, demands not there that is a problem. So now the shorts are very very company specific.

It's not it's more specific than a macro view. But this is a real source of alpha generation in a market like this. This final point is so important, not just Walmart versus Amazon, but Alphabet versus Facebook as well, Barbara, and fantastic to catch up with you, Barbara, and burn out there of Wincress Capital. Joanna us Now is Selita Marcelli, chief investment officer for the America's at UBS Global Wealth Management.

So to let's start here. I wonder your view on the following Is this something you want to chase or something you want to fade. I don't think that this is not something I want to chase. Look, I think the market is have seen earnings that are not as bad as feared and perceived fair to be davish because their data dependent and data is coming a little bit softer. But I don't think FAT is pivoting here. I don't think the market is pivoting. There's a long way to go.

At least in the short term, it's going to be much more shoppy. I think we're going to see some of these games take can out on the market, so I wouldn't necessarily be chasing it at this point. However, Um, if you put your long term investor lences on, then it is still a great time to invest. There's still a lot of opportunity. Just that the next six months I think is going to be quite volatile after this earning season is over, Selida, what are you looking at

for the catalyst for the declines that you're talking about. Well, first of all, Um, in this earning season, we heard a lot of talk of recession, but we haven't seen any indication in the results. Right, We're not seeing broad based UM layoffs. There's maybe slowing of hiring UM and and consumers are still resilient, even though we heard that you know, low income households may be seeing some pressures from Walmart from a t nt UH, it's still consumers

are resilient. Visa told told us that credit card spending has been very strong um, we're seeing still travel, leisure, Um, you know, seeing a lot of great demands. So I think what we would be looking at is, first of all, what is happening on the um hiring or or or or employment side. And in any case, that's what FED is looking at as well. Right, more than anything else,

wage growth is important. And if they can see that the vacancies are coming down and that takes some of the pressure of the wage growth, that would give us success that they maybe they will be able to pivot. But if the you know, if we stave otherwise, then um, you know, it probably means that the consumers spend, real consumer spending that has been flat so far will probably tear our negative and there's going to be a higher

probability of recession coming towards the end of this year. Well, soel, you know, we were catching up with Barbara and Bernard of Windcraft Capital in the previous hour and she agrees that the market got this FED entire FED conversation wrong, that the pivot isn't necessarily coming, that it wasn't as devilish as the market perceived, and she said for that reason, given the environment she's looking at, she is sitting on a mountain of cash? Is it right to be sitting

on a mountain of cash right now? Um? I don't believe. So. I mean you as an investor or, as as our clients, private world clients or should have enough cash uh you know, to get you through the next six months and liquidity for the next two to three years for expenses. But beyond that, I think there's the benefits of staying on the sideline. Staying in cash is limited, but the opportunity cost of being out of the market for the long term is much much bigger. Um. You know, I think

what we did so many analysis on this in our team. Um. You know, if if if, if you wait for historically going back to if you wait for another ten percent downside and then get in and then sell at the brand new highs, you're most likely to underperform uh eighty times versus a buy and hold strategy. So I would say this is like I said before, for a long term investor, is still a great time to invest because we have a low average valuations in the equity market.

We have seen almost five percent the rating compared to the last twelve months. Um. Right, and when you look back since nineteen sixty that is sort of consistent with return expectations of seven to nine percent annual for the next decade. You have bond yields that are UM close to highest since two thousand eighteen, and before that the highest was two thousand eight So UM, you know starting point in buying is actually a good indication of your

total returns US. And then you have in alternatives. Even in the private equity space. Right, you might see for existing funds valuation downgrades in the near term UM, but data tells us that funds that are launched UM a year after the peak or after significant sell off in the in the public markets tend to have superior returns over the long term. So I think staying in cash is not the best strategy if you have long term horizon. So later, I've got twenty seconds, I'll give you a

five year buying hold. You gotta pick one. Think what would it be? As boring it may sound, it's a wild, diverse, fied portfolio. I think that's stilled in only Why did I ask Selta? Thank you Selta Massetti? There have you BS Global westh Management Joint US now is Isaac Boltanski, Policy Research director of bt I, g Isaac, this feels like lose lose. I now you think it feels like lose lose? Which loss is she going to take? It feels incredibly difficult for her to pull back at this stage.

My sense is that she's going to have to go to Taiwan. I think that the optics would be absolutely atrocious if she skips out on it now, and it would be a terrible signal given given our relations with Taiwan. So, Isaac, how does President Biden deal with this and what does this due to his agenda when he's focused on this and he spent two hours and twenty minutes speaking about that with jjim ping rather than everything else at a

time when he's losing support rapidly. Yeah, look, I think that from a practical perspective, whether she goes or not, I'm not sure if there's much impact for the market. But I'll tell you this, most of my contacts and DC now believe that we're not going to have a massive pull back on the China tariffs. There's a sense that we will have some targeted and narrow relaxation of certain tariffs with a real focus on the consumer side. But beyond that, We're not going to have the sweeping

pull back on the tariffs at summit. Hope. There was some chatter not that long ago that we would relax all of the tariffs on Chinese goods. That's just not happening. I think as we see geopolitical tensions UM continue to mount with China over Taiwan and over other issues UM, the most that we're going to see are these targeted, narrow set of teriff relaxations focused on consumer goods and

other inputs. Which raises a question, Isaac, of how this administration is going to continue putting pressure on bringing inflation down aside from just pointing the finger at the FED. And they do talk about the recent legislation that they're lining up that Joe Manchon did get up word with. Do you think that actually could, in the near term

do anything to reduce inflation? Simple answer is no, I don't think that this bill, even though it's called the Inflation Reduction Act of two, is really going to do all that much for inflation. There's definitely some components of it that we can point to that are going to have an impact over time. Right, the drug pricing dynamics can have an impact, but a lot of that is

backloaded into a longer period. I think that the minimum tax can have some impact over time, but again that's limited, right, It's only companies over a billion dollars in income um. So there are definitely certain elements that we're going to see Democrats point to and say, look, we're actually trying to tackle inflation. But in reality it's going to have a marginal impact at most. Well, and that's if it

gets over the finish line. Where do you put the odds of Carson Cinema giving it a thumbs up and it actually becoming a reality. So there are three essays that we're all trying to figure out. Right, it's Cinema, mum, It's the Salt Crew, and it's sickness. Right, let's just run through each one of them quickly. Sickness. We don't know which senator is going to get COVID next, right, and that's something that matters when you need literally every

single vote to get it through. On the Salt Crew, we've got to watch Senator Menendez and Congressman Goottenheimer, both from New Jersey, to see if they're gonna blow up this whole deal over the fact that the salt cap has not been lifted or eliminated in this proposal, and then it's all lies on Senator Cinema. And at the moment,

I think that she's going to be a yes. Most of my contacts believe that she will get to yes, and that it's exceedingly difficult to see her blowing up this deal over things like the carried interest treatment, which is something that has mattered to her in the past. And so I'm telling clients that we have to now expect this bill to become law. Um, I think the odds are are a little bit better than three and four that that this bill becomes law by the end

of the year. Cinema sell sickness. I'm not sure it's gonna ring to it, but I'll got with it. Can I throw an nextra s Sacrecy Isaac? We didn't know about this. I found that pretty interesting. I just wonder what asked We don't know how did they get this one through Schuma Mansion without anybody knowing den In Washington they say that this was coming on. But I've taken great comfort in the fact that no one in DC

can keep a secret. That has given me comfort on numerous issues, and so it's a little bit scary that two U. S. Senators were actually able to keep a secret for this long. And my view on this is that it's it's pretty extraordinary in these times in general. But we've got to now think about the next iterative dynamic, and to me, that's gonna be political retribution from Republicans.

And you know, we've got to go back and realize that the same day that they've passed the Chips plus bill out of the Senate, Mansion announced this deal with Schumer, and Republicans feel as though they were hoodwinned because they passed Chips Plus through the Senate on an understanding that we would not have a reconciliation bill. And so there's going to be some degree of political retribution from Republicans over the next few months, which could make funding the

government a little bit more difficult. It could make getting an end of your tax agreement for stenders and retirement change is a little bit more difficult. We're gonna have to wait to see, but that's what I'm hearing so far from Republicans. What's retribution looks like When the game's all my stop mid sense just around the Culinariz sick. Isn't that why they make this play at this time?

Exactly right? And so look, we I think can have some degree of comfort in the fact that the mid terms are largely baked, at least for the House, highly likely that the House is going to flip. The Senate will wait and see. And I do think the Republicans probably have some good attack points that are going to come from this mansion deal, saying that you're raising taxes in a time of economic slowdown. So I think that the Senate dynamics are perhaps a little bit more in play.

My two cents on this is that the lane duck session is where things go to get done. That's usually where we see big bills and small provisions all come together and and past because no one wants to be in d C during that period, right, They smell the jet fumes that want to get out of town. And so my point here is that some of the things that Congress has waited for um until the lame duck can get more complicated now that there is this dynamic

and political retribution. I said. Also to catch up, I said, both Tansky Deaf great c I j this is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. 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