Surveillance: Inflation Debate With Hooper

early to say it's essay this summer. But David focus land Out his team is Deutsche Bank, with the leadership of Peter Hooper, the whole whole head of economic research, have generated eighteen thought provoking must read pages for Global Wall Street. We're honored that Dr Hooper could join us this morning. Peter, you say it is the end of neoliberalism, we have a risk of going back to ray can voke or how close are we to going back to

a time of shockingly high inflation. Um, We've obviously seen a huge shift in both monetary and fiscal policy that's given us a lot more stimulus to the economy than ever anyone would have imagined. A couple of years ago. Uh, the chances are getting back to the high inflation sixties and seventies have have taken a leap forward. Is still not the most likely outcome, but certainly the risk of risen have risen tremendously thanks to uh GDP in in

fiscal stimulus in the last year and a half. Who would have imagined seeing something like that Peter's This increasingly becomes a game of faith because people are dismissing current data as simply transitory. How do you convince clients who say, look, it has been this way for twenty thirty years, where we've seen inflation come down progressively in a steady fashion. If you look over time, what do you say to them to convince them at this time is different? Uh?

And at least so you're right, the market is remarkably calm about in the face of the storm coming. Um. I think you have to live through a surgeon inflation that's going to be reversed for a while, and then you have to look ahead to the possibility of an economy that's can be operating at well above potential. I mean, yes, we've been expecting. Uh. We had a big surprise in

in April. UH people have had revised their expectations and now the numbers were likely to get for may not looking anywhere are scary, and there are reasons to expect things to to slow down the near term. But if if we get this increase in household saving uh in excess of ten percent of GDP that's been salted away here not spend so far, if that begins to come on stream as households are normalizing, they're spending as pent up demand of being released. Uh, we're gonna see this

economy pushing well into overheated state. And the problem is that the FED has told us they're going to be uh late in removing the punch bowl if you will, um, I mean the They want to see the economy overheat before they start raising rates. There's gonna be a recognition lag, and there's gonna be a long response lag of the economy to Fed tending. So the chances of things getting out of hand down the road certainly have increased. Hold on a second, Peter, are you saying out of hand?

And this is a distinction from other people who say that, yes, we may see above trend inflation, but we're not going to go back to the nine seventies. Are you saying that we could go back to nine seventies style inflation. There's certainly a risk there. Um. You know, our our our numbers say that there is a chance, in fact,

an uncompanably high chance. That you see the output gap for the US, the amount by which GDP exceeds potential moving up above to the highway scene for the last three or four decades has been around two percent, and inflation hasn't gotten out of control. UH. In the sixties it got went up to five and a half six percent. We could be there if as much as a third of this UH savings that's been accumulated unusually large saving has been accumulated over the last year and a half,

it's been out over the next year or two. UH here, that would be a massive push to GDP. Peter the Bank of England chief economist Andy hal Dane, writing in The Statesman yesterday, saying this is the most dangerous moment for monetary policy since inflation targeting began in two He's saying, you know, you can't look anywhere and find something as price isn't rising. Is this overheating? UH? Is this overheating? Intention shared in the UK and the e c B as much as it is in the US. Well, I

think so so Europe's in a different situation. Uh. Certainly that the labor market going in was not as tight as in the US. Uh. And Uh, we have not seen the kind of shift in fiscal and monetary policy regime that the US has had. The ECB has not said they're gonna be reactive as opposed to preemptive if inflation we saw inflation picture in Europe the way we are anticipating in the US, I think the e c B would respond quite differently. Uh. And Uh. Well, we have had the m G e P, the UH, the

the recovery recovery program, et cetera. Spending in in in Europe coming up that's not anywhere near as large as what the US is has untapped. So yes, I think there is concerned about near term supply disruptions and and we are seeing some impressive increases in inflation in Germany. Um, But the sense that the risk is anywhere near as

large in Europe, it's just not there. Dr Ooper underpinning this, and I say this with great respect to Steve Roach, you know him from Morgan Stanley and now Yale University years ago. Is the underpinning of your work at the I m F and also the work of Duly folkus landau Garber, which has always watched the flows, watch the money. Many of you folks will know Martin Wolfen is wonderful work at the FT on this as well. If we get the time bomb in your eighteen page report, what

does it do to the flows of capital in the world? Well, now, the time bomb is another way of describing the FED being late to late to the party, Okay, late in terms of taking the punch fell away because we've got in behind the curve. We're gonna need to act aggressively. That means rates go up sharply. That's very disruptive to financial markets. It's very disruptive to many emerging market countries with huge amounts of debt that are gonna be very sensitive to a sharp rice in US rates. That I

mean that that that that's the concern down road. It's a risk. It's not not in my way of thinking the most likely scenario yet, but it's certainly something we need to have our have our attended UH tuned into your X access in this report to be clear, folks, is not getting out to Q three or Q four and the rest of the game of market economics and the financial media. The Deutsche Bank view begins to frame

out two thousand twenty four. What is the efforts we can do before two thousand twenty four to ameliorate the time bound? Well, I think the I mean the FED has have gotten into this um inflation averaging framework R. This was this was exactly what they needed to do to deal with the world where they were struggling to get inflation up to two percent and get inflation expectations UH to a more desirable sustainable level. Inflation expectations are back.

I think the FED is going to need to recognize begin to recognize this risk certainly over the next year UH, and begin to begin to edge toward a sooner tightening than it is currently. Well, Peter, let's started at Jackson Hall. I don't know if you're gonna be there with David, but we'd be thrilled to speak to you. Our Michael McKee I know, will be reporting there. Let's go to the time bomb of Jackson Hall. Is the time bomb of Jackson Hole for the markets for our radio and

TV listeners and viewers. Is it a change back to the theories and regimes pre pandemic? Can the FED do that leading the rest of the central banks? I think I think the central focus of Jackson Hole will probably be is the FED going to give us a clear signal that they're beginning to unwind the talk about unwinding their balance sheet? Uh, We're still We're still at ways away from the FED recognizing seriously, Uh, this this risk and I mean they have ways to go to get

to that point. And Peter, this is a lot of people are looking for the talking about tapering or talking about talking about tapering as being the key moment for Jackson All. There's also a question, though, going toe as you did, does the FED have the tools to control the control inflation in the way that they have in the past. And then I think is sort of underpinning your call. Are you saying that the FED does not have those same tools given how much money has been

pumped into the system. The it certainly has the tools to deal with inflation. It doesn't have the tools to deal with a with a in a soft landing sense, if you will, It's very difficult if you're going to be behind the curve to deal with an inflation problems, building some momentum that's getting into expectations and moving beyond the GIRED levels without being very disruptive. The FETE has never been able to deal with a rising inflation problem

bring it back without causing a recession. And if they're behind the curve when they start this process, it could be a major regnition. Dr Hoopers, thank you so much for this first conversation and it's important research for thrilled that Peter Hooper of Deutsche Bank could join us today. Right now, Katrina Dudley joins us with Franklin and this is really special. She's got a real ample career on the cell side and securities research UH and a portfolio manager,

particularly in your with Franklin Mutual. Katrina, good morning to you. How much of a value is Europe right now? Look, Europe has always been a quintessential value market. You just look at the construct of the market. It's heavy and financials, it's heavy in energy and their two sectors that are trading and very very cheap multiples um. But the good news about Europe is actually the construct of the market

is changing. We've now got a rising luxury sector, which is the equivalent of the technology sector over here in the United States, and that sector is actually growing. I gotta stop, but come on, are you telling me Louis Howton is equivalent to Apple or Amazon? Um? I think Louis Baton is actually even better than an Amazon because it's it's it's brand something here. I'd agree with you exactly, but you can't. You can't replace some of their products.

You can't get some of their handbags at the moment, and if you've tried to ordering some of their jewelry, it's out of least Keen Mrs Keane would agree. And literally this is if you manage a bit, I'm going to walk off the set. He will have, you know, nightmares from dinner conversations of your Meanwhile, we're as talking about the e c V policy and tandem with e c V stocks, and really the underlying question here is is there an exit strategy that could be done with grace?

In other words, can you buy European stocks for a longer period of time with faith that the ECB can extract themselves easily and gracefully. Well, I think it's interesting because you were talking about grace Kelly before and high heels backwards about half the price. UM. If I take a look at the exit out of this, the ECB is watching the FED. Um. The European markets are actually behind the US in terms of our recovery out of or actually recovery from the COVID virus, because the vaccine

rollout was slower, um. And so I think they're really looking at the markets. They're looking at the FED action, and I think that the e c B will be slower to act this time. UM. Just to have a look what happened back in May where you saw kind of Italian deels blow out and it was kind of this mini tape the tantrum, And I think they're really watching to see what happens because it's not just about what the bit the e c B is saying, it's the implications of that on various markets, for example, in

this case in Italy. All right, well let's talk a little bit a little bit about Italy, and I guess the reaction that at least a lot of us on this side of the Atlantic look to when we try to sort of divine what the ECB is going to do and how it's going to be received. How are investors in Italy right now, the investors in Italian debt right now? Uh, preparing for whatever it is the ECB may or may not do. If I take a look, what we're looking at in Italy is support for the

new government. I think actually, where you know, I've talked about Italian politics as as I say, as messy as a bowl of spaghetti. But I think it's actually, at this time it's probably the best outlook for Italy we've had in a long time. And I think the EB is aware of that. They need to be accommodated. I mean, continued, anytime for one more question. We gotta get you back here. This has been fascinating. What kind of a victory lap

is Mario Dragging going to take at G seven? I mean, he's on top of the world right now, right, I don't think he's going to take a victory lad. I think he's a humble person and I think that he is quietly doing what's white Wait wait, wait, wait wait, I'm sorry, Contrada, Mario Dragging is a humble person. Really.

I think what he's doing and the role he's taking in Italy is doing something that you want all with politicians to do which is acting in the best interests of the country, and I think that's what he is doing. I don't mean to interrupt it. We gotta go. But in your research on luxury to find value for Franklin Mutual series, don't you find the Gucci store below the seven the Steps, the Spanish Steps. The Spanish Stairs in

Rome is the most dangerous store in Europe. I haven't been there because of the travel band, but I am very excited about the fact that Boris Johnson is now meeting with Joe Biden and we may be able to travel back to London and hopefully back to Spain so that we could go there in person. There well, I expect we do a road trip and we demand a surveillance remote with you from the Spanish Stairs in Rome. Here, Katrina Dudley, thank you so much on Franklin right now

widely anticipated. Jeffrey You joins us B and YML and their senior strategist, Jeffrey You the zeitgeist right now. The certitude is it's been one big short squeeze. Everyone was betting on lower bond prices in higher yields and the trade is swung with acceleration the other way, do you buy it? That is just a short squeeze, um mad And perhaps I'm heading into the summer months and people just don't want to take too much risk on in

either direction now. But given the experience over the past few years, you know, by definition, you know, risk on means um actually having equities not as risk off. Well, do you need to take that? That's okay, Jeff, Jeff, you know what that is. That's Jeffrey, you gome stuck today. Yeah,

that's going on, jefflicit. We're looking at a bond market and a lot of people are saying that it's an endorsement of the Fed's view that inflationary impulses are going to be short lived and we're going to end up in the same slow inflation kind of environment that we've been in for the past several decades. Do you agree? Is that the message from Bonnes Well again, the message from bonds is and they want to know, you know which type of inflation is that theft actually targeting. Let's

put it this way. We've actually had two straight months of soft jobs, soft wage growth now in Germany in Euros, BOE saying a wage growth wage settlement is not that strong. The most hawkish region in the world right now, Central Europe, Poland warning jobs are wage growth is not accelerating at the same pace as before the pandemic, So is inflation

really hush? But then again, should we be targeting this or is the market taking about that the short term supply constraints, they're going to be permanent and this is going to challenge the bond market and challenge the Fed as well. Jeff, how many queues should we be taking right now from the commodities market? I mean, we still see our oil brent crews still camped out around our seventy two bucks. You have a lot of the base medals are either are at or sort of near their

record highs that they set back in April. And may hear how much concern should be baked into reading those prices right now? I think the market is very concerned. But if you look at what the policymakers are doing, especially in China, what was the biggest marginal price for commodity prices globally China? And China is saying commodity prices are too high, that they are blaming too much liquidity. They are blaming speculation as well, some of the domestically driven.

Granted we saw the monetary aggregates overnight. But on the other hand, they are blaming global central banks as well. So they're saying, look fed or reserve ECB, you're printing too much money and we have to deal with the consequences here. So China can use price controls as much as they can, but the rest of the world less. So hence we should be concerned at the combination of

tightening by China and globally to contain these prices. I I look at where we are, Jeffrey you, and I'm going to suggest that our radio and TV listeners their heads are spinning over all the different opinions, all the theory, the Ekano babble that's out there as well, And to me, it comes down to the time continuum, the X axis. Deutsche Bank looking out past two thousand twenty three with their time bomb of inflation, and others looking wicked short term.

That's a Boston phrase. If you're with b and Y Mel and Jeff you, you've got to have a full understanding of the phrase wicked. What's the X axis look like? For Jeff you? What does your continuum look like from now out, one year out, two years, at three years. I'm looking at the next six months. Actually, I'm looking at what the ECB will signal in September, not today,

but September. Talking about tapering. If you're looking at Eastern Europe, you know they are signaling advancement already a full rate cycle being priced in over the next eighteen months or so. You're seeing some of that within Scandinavia, Australia, New Zealand, like all the list goes on and on. So I don't think we should be blase and just go b O J like oh, five year inflation expectations are are wherever.

It's much more about the short term and within the next three months we need to see whether these supply issues are indeed short term. But if they are going to be persistent, then central banks probably will have to move and that's going to introduce volatility into the market. So, Jeff, what would you be doing right now? So right now again, reading the tea leaves in terms of central banks probably where in a holding pattern they're heading into August and September.

Look at the event risk, so you want to be light on risk but then start to factor in upside surprises for vol and for inflation. Got Jackson Hole coming up where there's more communication. ECB September meeting is going to be crucial. German elections is are going to be a new era for europe reflation as well. The UK taper, the furlough scheme coming off, and the bo WE will decide where they want to move towards a new regime.

So I think all of this can actually happen in the next three months, So for those waiting for another year or so, I think that's going to be too late. So risk light heading into summer, but you want to have some risk on in either direction heading into August

and September. Any any confidence in the trade of being short government banced, so that is still going to be highly contingent, you know, on what the FEDS would So for the short term, volatility is going to pick up, so you want to own fixed income volatility that price wise, they're going to keep the range in place because that kind of tightening and financial conditions through lower prices and higher yields. That's going to be a step too far

a central bank of the time being. But you want to own a fixed in combab di Jeff for you, thank you so much with bn y mel and greatly greatly appreciate that. Joining us right now. Sebastian Galley Woria coming to us today from Scenic looks a Sebastian, good morning, Good morning. What is Luxembourg like? I think you know seriously across this nation of America for most of our good listeners, including me, I have trouble finding it on a map. But but, but seriously, what what does Luxembourg

look like on a beautiful summer morning. It's beautiful, it's sunny, it doesn't mean a lot also um and there are cows around, and it's a huge financial center, which is a bit unusual, like a small country between Belgium, France, uh and in Germany. They speak a dialect which is a mixture of all three and they speak French and German as well as English. So quite a few people coming from the UK here. Is there a dominant language?

Is French the dominant language? No, it's what they call Luxemburg Ley show duxin Bourgeois, which is a local language which is a dialect slash language see folks that you can learn on surveillance. It's mapping it right now. And yeah, boy, I've been all around it. I just haven't been to I've been all around semestion. Gilly has been all around our economics, financial investment, semeestion. What is the thrust of your note after you see the kind of inflation levels

we speak of in America. Yeah, it's it's a very interesting phenomenon because of the reaction the equity markets relatively positive for somewhere nonsense futures of two zero five exactly. And what what do you have is inflation rising one because the bottlenecks number two because people companies find it easy to pause through inflation. Why because inflation becomes unstable. Once inflation starts to rise, it has a certain tenity to rise even more so people think they can pass

it through. We're gonna get negative economic data because of this in the following month. And then wage expectations have reset higher because people are much more optimistic. They have suffered for decades of low, low wages and suddenly there's a reset which is happening that feeds also into a higher inflation. So the question, of course is whether this is transitory or not. And the answer is and make sure that a lot of it is transit OI and

some of it is permanent, which expectations have risen. This is a new America and that's a different one. Record high moments ago in the standard forced you can retire. Yeah, exactly, I've had enough, all right, Sebashian. You know, we we're hearing from the ECB today. We and we we have a pretty consistent message from the Federal Reserve UH that they are going to continue to support UH this economic environment. But there's a lot of folks I think starting to

say enough is enough, It's time to pull back. Here, the world's reopening. Enough has been done here, we can pull back. What do you think about that, Well, it's if you imagine it. You're in the race and that we've just basically started accelerating. The last thing you want

to do is shoot yourself in the foot. So you want to continue accelerating as much as you can, but there is a maximum amount of explorations you can reach other once you get exhausted, and that's a fine balance between shooting yourself in the foot and going too fast that the FED has to maintain. And as you can fee with the reaction and yelling in US territory thing interest rates have to go higher. We already are being prepared for the phenomenon that interest rates eventually will go higher.

So the Fed agrees with you, but it is talking to the US Treasury. Sebastian the sigooy over. That's luxembourgsh the way I said that to sigooy over to your wonderful note on China, I love what you say about clear and reliable signals of goodwill, and part of that is a stronger and men be scene in China against weaker dollar. Are you actually looking for a de escalation

of the tensions of China and the United States. Yes, I I think that the comment which has been made by the first talk of trade talks between the United States and UH in China has been to dismiss them and to say this doesn't matter. But it's very important because in the process of the escalation is one of the last up to two months. It's a very long process.

Why because you have to lead the opinion. The opinion in the United States has been led against China and China also against you US, and to change that process is very difficult as slow. UH, the context, the language has to change, means that the process which is started now should continue. And then if therefore, the question is not what's going to happen the next two months, which is more positive news, but what happens afterwards? Uh, do you get a credible deal? Do the Chinese let their

currency appreciate? Do you really deescalate? In a more fundamental basis, They remain adversaries from a strategic point of view, but they decide to some extent that engaging as the Europeans are doing with the Chinese, the Americans are willing to do with with China. And that is of course very

beneficial for both US equities and Chinese equities. All right, specially with that backdrop, where do you see the greatest opportunity as you think about your global macro outlook here, given the various stages or the uneven stages of reopenings and vaccine rates and that so on, were you doing

your most work now destruction? So what you can imagine is the world not of this year, not of the next here, but in the following year, will be one of moderate growth in develop economies, whether it's in the United States or your particularly so in Europe. Less so in the United States and disruptions, new technologies that change fundamentally how we operate will allow companies to become more cost efficient, demand to be better reached, and that process

has already started. These stocks tend to be expensive, and the author are that they kind of are going to get much much more expensive. So the process of creativity is going to be rewarded evermore in the in the

following decades. And this is the beginning of the time when you want to be focused on these kind of positions within the cosmic nature of your strategy and the Sebastian we love your research notes, but does it distill down to your long in the stock market than in this great bull market you can still own equities for an enthusiasm of total return. You can so our value on the U S stock markets. You want to be

a long value and cyclicals rather than growth. So we're quite Britain on growth, particularly for next year, because we think that as if at times will go through the eye of the needle, what will happen once it goes out there through the eye of the needle? If he's going to rebound an incredibly rate. Why because they are the companies which will generate the changes of tomorrow, not only the company which sharing here, but the companies which all here in the next last to ten years. So

that's a huge opportunity to step into growth. So growth should stay expensive irrespective of the fact that it should go through significant crashing. So for now we'd like the JP Morgan, for example, more than Apple um. But it doesn't mean that Apple has a long term strategy. If you can hold your portfolio for five a tenure is just not an awesome position. Very good, Sebastion Gali, thank you so much. With an already from Luxembourg. 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 right to the Surveillance Podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m