Surveillance: Inflation Distortion with Stiglitz

and of course on the Bloomberg terminal. What we're gonna do is dive into a conversation here on the great unspoken, and we can do that going back to the giant David Ricardo of the early nineteenth century who changed our language about how the halves gain advantage. Stiglitz is of Columbia, the university professor Joseph Stiglitz, joins us this morning at the bottom of your wonderful essay on inflation and project syndicate,

Joe Stiglets you talk about monopoly rents. I would expand extend that even more to monoximistic rents, which is economic mumbo jumbo. You teach for they has gained how much did they haves gain off the fiscal largesse of this pandemic?

Who an enormous amount? Uh. You know, it's got a lot of attention that while so many Americans were living, hand them out money that was going to them just enabled them to get by the people at the top, we're making literally billions and billions and billions of dollars. So one of the things in that article that you mentioned that I advocate is we're going through a very tough time. Uh, there are prices are going up, and it's a little bit hard for those at the bottom

in the middle. Why don't we have a excess profits tax on those companies that have done very well in the pandemic and used a a aneuver of that to help those who are really struggling by one time attacks, just to uh, you might call it a pandemic inflation adjustment and Joe and Ah luck in America, which has moved on from that kind of language to love of the individual. Let's say you can't get through and excess

profits tax, what's the second best thing to do? Well, I can tell you what the second best thing not to do the best. It is not a good thing to raise interest rates to kill the economy in order to be what is still moderate inflation seven And if you look at those inflation numbers, they're all distorted by uh, you know, a huge increasing energy price that is not going to continue. The price of oil went from below normal levels because of the pandemic to moren real levels.

They're not going to go to stratisfy spherical levels and use car prices. We know how to make cars, but there's a short chips, a shorty called wifire in Japan. So why killed economy won't solve the problem? Will help?

Hill Brand got it absolutely right. There's there's an important distinction here within what you're saying, which is, as you look toward the FED and the way that they should handle policy, they should continue to rely on fiscal policymakers to try to help the lower class, but that their policies are more helpful to the lower income individuals and they are harmful in terms of widening the gap, fueling market gains that have really led to the bigger dispersion

between the wealthy and the poor. Can you explain that because a lot of people view the FED as the instrument of widening this wealth disparity, Well, the Fed, Uh, whatever it does has distribution effects. I mean, we have to admit that it tries to attend that it's absolutely neutral, but what it does has big distributional effects when it lowered the interest rate, as it did beginning and the Great Recession two thousand and eight, the big gainers were

those inequity markets. Losers included those who uh elderly people who had put their money and tea bills. That return they got on their tea bills went to zip uh. So they were the people who lost, and the owners of the equity overwhelmingly evidence overwhelmingly those in the upper one they did very well. No, at the current juncture, if you raise the interest rates, it will slow down the economy, and the first order impact is going to

be on unemployment. People who might otherwise have jobs won't get those jobs. But but but, Professor Sigletts, how can you say that that's really a risk at raising rates fift even a hundred basis points at a time when they're near zero and you have a labor market that's so tight that you have vastly more job openings than you do people to fill them. Well, first of all, the numbers in the unemployment rate don't give a full picture of what is going on in the labor market.

We are millions short of the number of jobs that we would have had had we continued the pace of job creation. Well, I think we've lost bonds school population. Yeah, we're gonna leave it there. I think with the technology when the professor stickers will leave it there and we'll have them on again. I had at least four more

questions as well. I want you to think of Bank of America in the long term roll up of many banks into one giant bank that could be black So Smith Klein, Yes, it's Glasow from way back, and then welcome and Smith Climb Beacham in there as well. But it's essentially a pharmaceutical and consumer roll up that is challenged. Emma Warmsley is of lorel and of course the chief executive officer of Glacksow Smith Klein. She and John Pharaoh in a conversation. John is Dame Walmsley is under a

bit of distress. That is a beautiful introduction, Tom, and thank you for that, Emma. Fantastic to have you with us on the program. Let's work through the outlook that we got from earnings this morning. The Nittam out look is good, forecasting earnings from the farmer and vaccines business to rise to alter fourteen percent. City came out with this in response GS case pass to a higher multiple remains dependent on solving the post twenty seven growth rate

as opposed to the near term guidance. What's in the pipeline emma that's going to satisfy those people. Well, first, well, John,

thank you for having me. Absolutely delighted to be here today off the back of announcing strong performance for twenty one and excellent quarter and really showing momentum across the business as we're building into this landmark year in twenty two, when as you know, we are separating into two exciting growth oriented companies, and delighted to be guiding as you said, for this year for new GSK buy a farmer with a five to seven top line growth rate and twelve

to fourteen in terms of operating margin growth, and that excludes any contribution from COVID Solutions. It's also the first year of the five year outlook we've given of growing up more than five and more than ten percent, which is really a step change in delivery four g s K, and at the heart of that is the progress in innovation. When you look back at twenty one, we actually grew on new and specialty products by twenty six percent. That's

very important momentum. We look forward and seeing vaccines obviously adut vaccination hit by the prioritization of COVID vaccines, but we see shing it's a very sizable product for US, doubling by twenty six And I'll come back to consumer later. But across our total R and D pipeline, we have sixty four assets, twenty two of them are in pivotal stages and seven with big milestones in rs V and rheumortided author writers, in oncology and in hepatitus B so

lots to come. I have to say, written the transcript from a recent healthcare conference over at JP Morgan and your presentation when it went to oncology, I found it depressing, gemma depressing, how neglected that area of healthcare has been over the last two three years. Just fixing their emma as a macron fade. How much for tell? When is that going to be for you? Well? Oncology is one of the areas of specialty medicine that GSK has reinvested in.

Remember one of the most important strategic shifts we've been driving as towards vaccines and specialty medicines. GSK got out of oncology completely, and then over the last four years with new talent, UH, some business development moves and homegrown assets as well, we've sound really good growth in oncology and exciting emerging pipeline too. The tragedy has been over the last two years, as you say, actually diagnosis and surgery rates are down a lot. I think in a

variant cancer. I'll give you that example where we have a tremendous medicine for women facing into a really difficult cancer diagnosis and surgery rates are down twenty percent. So we're all hoping that as the pandemic moves into an an endemic stage, we're going to see further growth fueled through through that and mainly, you know, real impact for patients. We hope we can fix some of that because that

needs to happen soon and quickly. You mentioned spinning off the business, splitting into let's talk about how you're going to do that. You've got a plan, You've had a plan, only leaves got other plants. Have you spoken to the CEO about their bit? Have you spoken directly with him? We've been very clear and very public since the news on this emerged in our press release statements. That's obviously

g s k's priority. In fact, since we announced the deal with Visor several years ago and are intent to emerge,

our priority has always been about creating shareholder value. So when these unsolicited offers came in, obviously the board took its responsibilities to review them very seriously, very seriously, and after that we did reject them unanimously, alongside our joint venture partners as well, just for fundamentally undervaluing what we've built in this pure play consumer business and particularly it's

future prospects for growth. We've had a lot of support and some of it very public from our shareholders who we listened to and talked to a lot about continuing with the plan forward in terms of a emerger that's in a matter of months, and we have a great Capital Markets Day coming up on the twenty February when we're bringing going to bring a lot more visibility to

the above market growth prospects for this business. It's sustainable margin expansion, great cash generation and the truly unique portfolio and great management team. Well, maybe Alan has other plans for the end of the Maybe he has other plans to come back. Is he aware of what your price is. I don't expect you to negotiate with me right now, but does he know what your price is? We've been extremely clear that our priority is shareholder value creation. We've

never disclosed any kind of price. Our focus is on making sure that we you know, prioritize our shareholders, that we unlock the balance sheet for GSK absently a better offer than the plan we're working on for the d merger. We're going to stay very focused on executing that success. You know what Elliott Management thinks. This is what they put out in a letter last year. I'm going to allow you to respond to that emer and just the moment.

This was the quote from last July. This is a firm with quote a poor record of operational execution and value creation, leading to skepticism about the company's future and under appreciation of its true potential for some people. M A, you are a CEO under pressure at the moment. It's almost five years at the top, five years which have delivered negative returns for the stock. How you're going to

keep people like Elliott Management happy? Well, we are very focused on listening and to our shareholders and talking to them.

I was brought in to address perennial under performance for this company, and over the last four years we've been addressing in a comprehensive way a wholesale transformation of reprioritizing investment in R and D and strengthening the pipeline that we've definitely seen now with twenty two assets in our pipeline and pivotal stage readouts, we have been completely reset the group's structure with this path forward into separation into two new companies, and most importantly, we're going to see

all of that translating into meaningful growth and we're incredibly excited that the year this year is going to be the first year of that delivery of more than five five percent top line growth and more than double digit bottom line bottom line growth, whilst allowing for continued investment in and prioritizing of the pipeline with a great leadership team that's completely to delivery for that. So I look forward to seeing that step up performance materialized and catching

up with you soon. Thank you for being with us. Emma Walmsley, Dad the CEO of Glacksow Smith Klein. Right now, what we're gonna say is this, the research has gotten better since the crisis two thousand seven. Two thou eight is a broad statement. Research is better, but then there every once in a while exceptional pieces where you go, well, this ruins my afternoon. I've got to read every word. I do that with Alex Schiller, Danny Newman, and Rebecca

Patterson at the Bridgewater Shop. They wrote a brilliant, brilliant note on the dynamics of what we've got with rate changes and balance sheet changes at our central Bank. We're on the Rebecca Patterson of Bridgewater joins us this morning. Rebecca, congratulations on a thought provoking note. How does all of this monetary dynamics, think of the mathematics of say Richard Clart of Colombia and x FED, how does all of that fold into your guestimate on what economic growth will

do well? First of all, thank you so much, Tom. That was very kind of you so early in the morning. Especially, I'm only kind early in the morning. So in terms of the FED, you know, I really think they're in one of the most difficult situations in our lifetimes, and that you still have very strong nominal demand. Even if growth moderates a little bit this year. We expect nominal demand is going to be well over nominal GDP will be well over consensus expectations, but also you have inflation

well overation over expectations. And our view is twelve months from now, CPI is probably going to be closer to a five figure, not the three ish that consensus is looking for. And so what does the Fed do If they tighten too much, they risk slowing down the economy,

starting a recession. They don't want to do that. They're dealing with pandemic related data which doesn't give them as much confidence in their view, and their scarred I'm being generous he by you know, the tightening both rates and quantitative tightening guy gave us a sell off, so they don't want to go too fast, but they also want

to make sure inflation expectations don't get deanchored. So our our view is that you are going to see more rate heights than what has been priced in so far over the next couple of years, but not as much as needed to get inflation back down to that two percent target. I love the nominal analysis. It reminds me of cuddlo Ad bear Sturns a million years ago. And I want to take it over to a guy named Gallio, who has looked at the social dynamics of social aspects

of this is recent interview with David Rubinstein. I thought it was illuminating Rebecca Patterson. If we get a five percent inflation rate, what is the societal dispersion, the effect of five percent inflation between the halves and the have nots. It's a great point and I think it's something the FED is also looking at. And one of the reasons they're going to lean relatively more on balance sheet rather than rates is because when you raise rates, you are

going to hit small businesses relatively more. You are going to hit that lower socioeconomic cohort more because they rely relatively more on credit cards. So that's one of the reasons the FED would prefer to do a balance of these tools rather than just rate hikes. UM. But as we're looking at the different quintiles, if you will, of wealth in the United States today, one good thing, great thing is that the fiscal transfers we got in one

have created more wealth for everybody. UM. You have seen wealth at the bottom cohort go up significantly, their balance sheets are stronger, their debt levels are relatively lower. UM, they're seeing big wage increases and so high inflation, especially gas prices, energy prices, food prices, those are the big ones. They're definitely going to be a problem, but at least is happening against this backdrop where the starting point is so much stronger than it has been coming out of

past recessions. This dynamic, however, of echa of negative real wage growth, particularly at the lower income levels, is one of the reasons why people are saying we won't get to that five percent level in twelve months. It will be much lower than that, because realistically the economy will have to slow, and we're seeing that in consumer sentiment data. How do you push back against that? Well, I think I think that we are going to see stronger nominal

growth this year for a couple of reasons. One is the reopening itself. So as oh Macron continues to fade, hopefully and hopefully we have no new variants, we are going to see people going out to restaurants more, spending more on travel, etcetera. And yes, part of that is a shift from goods to services, but overall we think that continues to so port growth. I think, even more importantly, we think will continue to see an inventory rebuild. Now,

how it affects GDP is a little bit wonky. I don't want to go into that right now, but I do think that inventory rebuild will continue to create demand, which will create jobs, which will create incomes and spending. And then third, we think we're just in the early stages of a cap ex goal, which his recent years has been mainly tech. We think it's gonna be fairly broad based, and that's also going to be a support

for growth. You still have eleven million job openings out there right now, and while the pandemic slowing down is going to bring some people back to the labor market, we think to get all those people back in to reduce that UM that gap, we are going to see significantly higher wages. We think the wage growth is going to be sticky. We think commodity prices are likely to be sticky. We think house prices will be sticky. All of those simply because supply can't meet demand. UM Rebecca.

Within this scenario, here's what I'm struggling with. Five percent inflation twelve months out means a serious bond market sell off. It means a complete recalibration of longer term real yields of longer term base rates that the FED can really address. How can the market continue to climb and the economy continue to be stronger than it has been pre pandemic With that type of market turmoil, I think you just

hit the nail on the head. What what I think we're shifting into right now is is really an inflection point versus the last twenty thirty years. We had central banks fighting deflationary risks, bond yields worth falling kind of structurally, and that was pushing people out into more risky assets, out into more stocks, and specifically longer duration stocks because

they benefit from that liquidity. So where we were left is investors long bonds, long tech and growth stocks specifically, and guess who has the most of those the US. So now we're seeing a reversal of that entire thing. We're seeing higher inflation, pushing central banks to tighten um, pushing people out of those long duration stocks, pushing people out of those bonds. I think that leaves the US stock market relatively more vulnerable than a lot of markets overseas.

We're not barish on US equities, but we think that the opportunity this year for the first time in many years is going to be more outside the US than in And for those reasons I just cited Rebecca, I want to go back to your dark, conclouded past in talk dollar and foreign exchanges. Well, to me, it's amazing the foreign exchange tightness, the range bound nature of it. When it breaks, which way does dollar break? Oh, that we're wrestling with that one. Internally right now. We have

a mixed view on the dollar. We're embarished on the dollar against some of these currencies that we think will benefit relatively more from commodity rises from that inflation cycle, and then we're bullish dollar against some of the other reserve currencies, especially where the central banks don't face the same amount of pressure. Japan would obviously be a good example of that, or something like China where we see them actually easy and we think there's more easy to come.

The really interesting thing Tom right now with the dollar is that you do have this fed tightening cycle just just warming up right now, and higher yields traditionally have been a big support for a currency, but we also have a pretty wide current account deficits, so a big external finance you need. And when I just mentioned a minute ago about all these people who have gone into the US. Foreign allocations to U stocks and bonds today

are the highest they've been since the mid eighties. And so if we see that foreign money, maybe not all of it, but a piece of that coming out harder to finance our current account deficit, that's going to be a pretty big barrished dollar pressure. And I think that is part of the reason in January possibly that we saw a dollar weaker despite yields going up. Was that saw off and some of those foreign investors maybe pulling

back a bit. So I think it's gonna be a much more unusual year for the dollar than you'd normally expect in a tightening cycle. Again, just watch the money watch where you see the foreign capital going in and out of US bonds and US stocks. Rebecca, that was a clinic. Thank you, Rebecca Cadison, that Ridge, what are

we appreciate it right now? Our math conversation for the day we do that with Amy with Silverman, really quite good and the derivatives and the dynamics of the market at the Royal Bank of Canada RBC Ay, thank you so much for joining UH this morning. I want to cut to the chase, which as you go cross asset and your derivative analysis and look at equity presentation against optionality and the credit market, explain that in English, sure,

you know. Look it's uh, it always makes options people a little nervous when you see a flurry of credit hedging, so people buying downside protection in h y G the high old bond proxy e t F t L t l QT. We've seen a lot of that tom a lot. And even though we're getting that vixed number, as you said, kind of going back to sub twenty levels, that dynamic between the cross asset credit hedging uh not abating is a bit of a divergence from what we're seeing in

equities right now. I mean something's going on to the single name level as well. Facebook just having a massive months to on a single day. That's surprised a lot of people. But you take some signal from what happened with Facebook about the consumer at the lower end of the white spectrum, the lower end of wealth in the United States of America not throwing small business confidence as well.

You've got the media numbers, the average, and you've got the top end numbers which seem to blur the average, and I mean there's something going on at the lower end. I think we've got to pay attention to what are you looking at? Yeah, we've been quite fixated on this because you know, something our condust Tom port Shelli has highlighted is, you know that bottom wind tile of folks are now at a point where their liquid assets are

at you know, lower than pre pandemic levels. And whether or not that lead through has really been priced into options. You know, the short answer there, John is it hasn't. So like an ALI or Dollar Store, Dollar Tree, Dollar General, you know that Walmart, Yum, all these cohorts where it's very leverage that low end consumer. Uh, you're not seeing that concern yet weighted in the options pricing. The second thing I'll say is this earning season, options have really

paid off. So even with those high vixed numbers going into Facebook, going into PayPal, going to all these earnings, options were probably implying you know, relatively average implied moves, and we beat them by two or three times across the board. That's very unusual and we think that continues in particular for these names leverage that low end consumer. Well,

what what are you seeing that? Namy with Silverman. That's going against the common narrative that the lower income individuals are actually doing better, they're seeing disproportionate wage increases, and they still have a lot of cash left over from the fiscal impulse last year. Yeah, you know, I think what what is interesting is some of the read through that we've gotten from the recent reports would say that's

not necessarily true. And you're also starting to say, see other companies who have yet report, like I mentioned, like that Alis where you know that weakness is. So it was all give you an example, Ali normal excuse that demand for hedging number this past weekend was trading at average and now today has spiked to an all time High's that's that downside skew number. So you know, earlier this week and even last week, we're not seeing that start to be priced in, but now the options market

is starting to flag that concern to the downside. And these again are all the names where they're in particular more leveraged to that low and consumer than they would be to kind of your middle income or higher end consumer. This is a specific idiosyncratic trade targeting the likes of Walmart in Dollar General. As you were saying, companies that are leveraged to these consumers. However, is there a broader read through to the other equity parts that perhaps have

seemed invulnerable so far? Yeah, so, you know, I think like that always goes back Lee said to how the meat has made. So if you're looking at a broader read through two queues, you know that's going to be more tech heavy, whereas your I w M s uh you know, are less so. And you have seen the

performance diverge there. But I will tell you overall on an on a you know et F index level option prices have still been you know, relatively okay that they have not shown that concern even though we've seen a lot of demand for downside coming into the credit et s. And you know what we did is we ran h basically, you know, a cycle of what happens to SMP versus something like high yield during different rate cycles, and they

remain highly correlated. So we're talking ad plus percent correlation in different rate cycles, which tells me, you know, one way or the other. Uh, someone is wrong. It's it's either the SMP or that I M or ques or it's going to be those credit bond proxy E T s so Amy, just in terms of h y G at the moment that junk bond E t F. How would you play that at the moment. Yeah, So you know, look, something really simple is just to own h y G puts.

And the reason I say that, even though we've seen that, you know, lift up in demand, is you can kind of pull h y G back to its full history, which includes seventeen rate hike. Your skew levels are still in their bottom quartile, even though they look expensive now if you just look at on a pandemic basis, and one thing, one wrinkle I think you guys will remember is h y G was one of the names that

FED was buying in their facility last year. So I think to some degree those numbers in the last two years are very skewed because h y G and other et s were actually being purchased by the FED in the facility, you know, in and around this time, which is how most people look at their windows, which is why I think you go longer data and you see that skew number is still relatively expensive, which means hedging

is still relatively inexpensive. Really important conversation, Ammy, Thank you as always Ammy, with Silverman, the brilliant amy with Silverman of our BC in that relationship least of between credit and equities. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on podcast SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m