Surveillance: Inflation Drivers with Stiglitz (Podcast)

Joseph Stiglets joins us. And on any number of the topics we could talk about, we go to something dear to his heart is a gentleman from Gary, Indiana long ago new different bouts of inflation, fear and inflation scare Joe Stiglets. Your basic message is what everyone calmed down. Why is this inflation not like the inflation of Heller seventies. Well, first of all, it's mostly a supply side inflation. And think about some of the things that are really driving it.

Take the price of energy. In the price of oil, it's way up. We have a war in Ukraine. We understand that, but we know over the long run, and I when I'm talking about the long run, and it's not that long. Uh. The price of oil energy is going to come down because the backstop, as we call it. Uh, we know we can produce an unlimited amount of renewable energy at the equivalent of about fifty a barrel. And if that number keeps coming down, so that is the

number that energy is going to be. So you're gonna be disinflation. We're gonna go through disinflation in the future. Well, I can't tell you when it's gonna happen. Unfair, Okay, you know what's so important here, Joe. And if people even reducts back then forty seven out to the eyes and our disinflation and the two bouts of disinflation we

had into the early nineteen fifties. Once inflation begins to disinflate, do you believe it keeps going or do we come down and stay at a certain point which causes an uproar once? Is there a momentum to a disinflation? Well, uh, the people used to think that there was a momentum on inflation and then a momentum on disinflation. But uh, the forces for that momentum are much much weaker today than they were, say, fifty years ago. Uh, fifty years ago. Uh,

Unions were strong. When prices went up, they demanded higher wages. Higher wages led to higher prices. UH. Unions are weak, and so we're back to you might call normal competitive forces. And what we saw in the year before the pandemic that overall UH supply was extraordinary robust and prices were kept down. UH and I think we're going to be

returning to that kind of a world. Well, what's the Fed's role in this then, because there is this belief out there that this is a different moment, and people point to not just oil prices and commodity prices, but also this fissure between the US and China and a restoring of some of the supplies, which is naturally inflationary. Also some of the conflicts inflationary by nature with Russia

and Ukraine. How much are you looking at a FED that, even if they don't want to, has to raise rates substantially to get ahead of inflation that may disinflate down the line, but not quickly enough to create some real threats to this economy. Well, first of all, you know almost all those forces you site are either long term or real. Do we small, Yeah, we're going to be restoring we have low cost suppliers that are alternative to China, Vietnam and Asia. Latin America has a lot of capacity.

So yes, costs are going to go up and there's going to be a readjustment. But I don't and it's but it's gonna take over a number of years, and it's not going to be that big. We ought to get prepared for it. Um. What I worry is on the other side, that the fed UH works too fast and too much. Remember it takes about eighteen months for the full effects of monetary policy to be felt. And in the span of eighteen months, if the war in Russia comes to an end, the energy prices will come down.

That would be a strong disinflationary force. Food prices will come down. They're already signs of that. That will be a strong disinflationary force. Remember, over the last fifty years, public policy has been telling farmers don't produce, don't make so much food, And if we just reverse that policy,

prices of agricultural goods are going to come down. So again, we have a backstop here that it's hard for me to believe that will sit by and simply let prices be so high while we continue to subsidize our farmers. We're gonna tell our farmers. So it seems like you think that the potential error is worse but the FED going too fast rather than too slowly, which is the opposite of what a lot of people are saying, including

some FED members. What would you have to see to change your mind in terms of the data, in terms of the incoming developments on the ground of the economy, Well, I would be looking for a particular acceleration of inflation. Uh. You know, right now wages are not keeping up with prices. Uh really, Uh, the opposite of what you would expect

in a very tight labor market. So if I saw real wages going up dramatically and I saw inflation start to take off at a higher rate rather now the rate of inflation is happening and still going up, but it's at much lower rate, those are signs that I would I would would leave me to take stronger action. Joseph Stiglet's the Laureate of Columbia. Right now, we got any ways to go here with Kathleen vis Johnson is

just so wonderful at Oxford Economics is their chief US coons. Cathy, let me set the groundwork for what Lisa John want to talk about, which is just simply, where are we on the guestimate of Q three g d P now that July has closed. Do you have any handle on it or is it just too early? Hi? John and Tom happy to be with you. So, you know, three quarter GDP is going to be quite important because we had the two negative prints for Q one and Q two,

so so called technical recession. UM. We don't look for the large inventory drag that you had in Q two and also to QUBA one to some extent, so that's going to make things arithmetically look better. Right, So we're looking for, you know, roughly around one and a half percent annualized real growth for Q three, but we don't have many hard data points right to really corroborate that UM and particularly consumer spending is always at the heart of UM, you know GDP. Well, then link that into oil.

I mean, we were one twenty on Brent whatever it was. We come down many guests talking about we'll get some real good news on oil. We've got the news this morning, and I get it's just OPEC plus and that how sensitive is consumer spending? The oil in the modern day versus in the seventies when we were driving around VW Rabbit diesels. Um. Well, the consumers still very sensitive to energy prices, particularly gasoline. So so oil obviously is going

to be a big input to gasoline prices. But gasoline prices have really um weighed heavily on consumer sentiment and competence and also consumer's pocketbooks. So the fact that gasoline prices are down seventeen percent or so, that's big news. UM still high right, still, you know, well above four dollars a gallon, but the fact that we're seeing the decline that may lift spirits a little bit and help ease things a little for the consumer. But you know,

just keep in mind what the Fatal Reserve wants. And you mentioned the Fed officials still sounding very hawkish. They want things to slow down. They want the economy slow down. They don't want to crash, they don't want recession, but they do need things to slow down enable for inflation to continue to go lower. How much, Kathy is the Federal Reserve inadvertently tracking oil prices? In other words, you were just talking about how people will have lifted spirits

if gas prices come down. They might spend more, there might be a dip in some of the headline CPI figures how much will the Fed use that to back away versus say, you cannot count on this and it could change on a dime. Well, that's a good point, and we see the volatility across many asset classes, including particularly oil, and things could change um. But I think what they're going to be looking at is the fact

that the headline number can influence um inflation expectations. So whether it's market expectations, but more importantly consumer and businesses, that's going to be important. And as long as gasoline prices continue to trend lower, that is really good news for all together. Right, for all expectations and the actual

prints core inflation is gonna matter though too. Right the service prices, which we know have been rising, UM, that's going to continue to still be an issue from the Fed Reserve and they're not going to keep They're not going to take the ball, their eye off the balls. Put it that way. So today is either OPEC plus Wednesday or I s M Services Wednesday, depending on what you think. Tomorrow is jobless claims also the Bank of England, and on a Friday is the Big Jobs Report. Which data?

What type of data are you watching? And I keep asking different guests the same question, because that has been the key question for the Federal Reserve. What data matters to determine their policy? Well, every little bit matters, because if it's a it's part of the jigsaw puzzle, the broader portrait of the macroeconomy. But I would say, oh, this week, I would be looking towards the payroll number.

Um just for the fact that many of us have been saying, you know, when a technical recession but not a true recession, because the labor market is so strong. When the labor market is strong, it provides income, and that's the wherewithal for consumers to keep spending even though they're getting hit by by still high prices. If you start to see cracks and labor market, that becomes a very different story. Kathy, you and I have been through thick and thin on this, and right now is like

just kidding John Farrell, I'm drowning in gloom. I mean the level of gloom out there. Worried, the handwringing. It's you know, is it oh seven? Is it oh nine? You know, collapse of the Great Financial crisis. No, how bad is it out there? Kathy help me, Well, it's it's in our opinion, is not anything near the Great Financial Crisis or the COVID recession that we just went through. Um. At worst, it would be, you know, a moderate recession in our opinion, But we think if we do fall

into recession, it could be quite shallow. Um. You know, we were not in the camp that thinks that unemployment rate needs to go sharply hired to bring inflation down. We're already seeing goods inflation trending lower and um, and we think eventually, right credental prices will come down. His home, Sam Stove all a seafar. It was just on modeling nine down to seven percent or something like that. Do you detect a pause on the way down or is there an inertial force to it? That really gets us

back towards the vaunted that that the Fed speakers talk of. Well, we we have a similar forecast. Actually for this year we think nine percent. We're kind of trending around nine percent maybe eight for the next few months. By year and somewhere around seven percent. But the year and year comparisons get much easier next year and that's the key, and you don't need outright price declines, right, the levels

don't have to apply. Just the month to month change has to slow and we need to see service price inflation start to cool. But again, you don't need outright declines in price levels. And I think that's important to keep in mind, Kathy. How much does the policy mix in Washington, d C. Change the picture at all for you, whether it's the policy internationally with China or some of

the domestic bills that you're seeing proposed. Yeah, you know right now that the size of uh, you know, the billback mansion bill is um rather small rate compared to what we've just come through in terms of fiscal policy, and it's over a ten year period, so it incrementally could be positive for the economy. We believe overall socially fits starts to boost innovation and um technology, but but

not a big game changer for us. And it's just right now, there's not a reason for fiscal policy to pick up a lot and boost the economy because we wanted to see things cool down in terms of geopolitical that that is always a bit of a wild card rate. Um, we didn't really know what was going to happen with Russia and Ukraine. We don't really know what's going to

play out with China and Taiwan. A lot of brinkmanship and I think that makes you know, makes us nervous, makes the markets servous um And we'll have to see how that plays out, but that that's always a wild card for us, Canthy, Can I get to the academic debate at the moment in economics and it has implications for financial markets. It's being led at the moment by

Olivia Blanchard over the Peterson Institute. And the question I'll ask is the question they ask is through declines in vake seas involved less increases and unemployment when the initial vacancy rate is this high, Kathy, if you spend some time looking at that, because that seems to be the debate from blanchardtow going against say Governor Walla over the Fed. Yeah. I mean traditionally, when when the vacancy rates decline, you do see a large increase in the unemployment rate. But

we think this time is quite different. There is um. Even though the economy is slowing down, we still have a really tight labor market and there's still more jobs out there than workers. So I think it is possible to call the labor market equal the economy without seeing a real large increase in unemploymentry. We may get some right, but we're talking, you know, are we going to go to you know, two percent, three percent, four percent higher?

We don't think that's necessary to bring inflation down. We think there there is a way to kind of thread that needle, even if we have a bit of a mild reception. Kathy also going to catch up with you. As always, Cathy bus chances that of ox An Economics, Isaac Voltanski is a perfect person to speak to. It's with bt I g and Yes, director of Policy Research, but writes very informed notes on the synthesis of legislative

into presidential politics as well. Isaac, I want to go to a photo op pass, the fist bump, and maybe a photo op forward, which is the president meeting with the leadership of China. I mean, what does Mr Biden need on the photoop passed and the photo op forward When we see this morning slap of OPEC plus. You know, it's it's hard to overstate how disappointing this OPEC plus decision is for the Biden administration. Frankly, it's the geopolitical

equivalent of a slap in the face. The Biden administration made a huge miscalculation. Their bet was they could go to Saudi Arabia, they could have that fist picture with the crown prints, which carries a bit of political complexity to it, but that that would help make an increase in production easier for the pat This hundred thousand is not worth it or any of the political baggage that came along with it for the Biden of industry. You

are perfect about the machinery of our legislative branch. What does the people of Capitol Hill think about a change in the gallon of gas? They're not looking at every nickel move, are they? But what do they looking at? Well, look, and for a lot of these economic data points, there is a it's it's almost a political warshop test, right where, depending upon where you are on the ideological spectrum, you can use any of these data points in your flyers,

in your press releases on the campaign trail. But the reality is folks are feeling it at the pump, They're feeling it in their rent, they're feeling it at the grocery store, and I think that that is going to pull through to the election. And even though we had some sort of cross currents with the primaries and decisions last night, UM, that tell us a little bit of a jarbald story. To me. One of the reasons I have so much confidence the House is gonna flip Tom

is because of the inflation story. That impact on the pocketbook gives me confidence that Republicans are going to take the House. Isaac, how much it can President Biden come out and seem angry about this, say, this is a repudiation of the good graces that he showed. How much does he message that sort of disappointment in this versus at least it's something In other words, how does he pivot from what you just called a slap in the

face from the Saudi Arabian Kingdom. I mean, what we've seen thus far from the Biden administration is that the President will still speak optimistically, uh and positively about this. He will focus on attempting to cajole OPEC plus on the next decision. But we're going to hear something I think pretty sharp commentary from the cabinet members around this. UM. I don't know yet what The underlying justification is, as

you said earlier, is this a supplier demand decision? What really drove O peck plus is thinking here, But for the Biden administration, they were desperately hoping to get more than a hundred thousand barrels a day to alleviate the pressure of the pump in the coming weeks and months before the midterms. The good news is that gas prices have been down every single day since the middle of June. If they weren't heading in that direction, Isaac, this would

be much more controversial, Isaac. We always appreciate your time, sir. I got to catch over the weekend, I said bot Tansky there with bt I G. Kristin Bidley joins us now from City Global Wealth Management, Christ and I was going through the notes from you, and this just jumps out to all of us. We have shifted to our most cautious yet still fully invested portfolio since the first

quarter of Kristen. What does that mean? So what we've said, and we've said this for the past couple of months, it's really looking at where we could go from here. And so there's three different scenarios that we could see for markets and for the economy robust, resilient or recessionary scenario robust really strong growth. I don't think anyone is

really calling for that. We have right now about a fifty fifty chance in terms of tipping over into a true recession, not a technical recession, or seeing that resilient, slowing growth environment. And what we want to do is prepare portfolios for both. So the changes that we recently made in terms of investing in high quality equities, we've been there all along really year to date and starting in Q three of last year, upping our quality and

our fixing come portfolios. And we also pulled back on some of our commodity positions energy positions due to the fact that we're seeing some of those inflationary pressures a bait. And that was really more in our portfolios for a hedging purpose than any type of long call. Kristen, you're so good down the income statement. What did you learn about margin dynamics? Is I believe we've got seventy x

percent of earnings in right now? What have you learn about what we need to study down the income statement? So what we need to look at really going into Q two. The end of Q two earnings. In Q three earnings, I think when we look at this rally that we saw in July, I know a lot of people pointed to that there's a potential fed pivot, some dovish comments. I don't think that was it at all. I think earning showed some resiliency that was not antithy.

Where was it on the income statement? I don't you know. I get the earnings were there, and we chat up revenues as well, it was just about gross margin. Was it about dynamics, we're operating income? Where was it on the income statement that you saw? It was actually a top line revenue and so okay, when you look at the top line revenue growth that we saw, I think that was surprising because everyone was looking at after you're

looking at you are looking at consumer spending. Consumer spending is six of GDP, and we were trying to look for cracks in the consumer backdrop. In Q two, we started with financials. We looked at the loan loss reserves better than feared. Basically, everything came out better than feared when it came to the consumer. The only real cracks that we started to see we're in the mass market

retailers right, like Walmart, Best Buy. We saw some commentary there in terms of the shifting consumer spending pattern and this is why when you look at our portfolio and how we're allocated, we want to prepare for those two different situations, resilient or recession, because from here, if consumers are shifting their consumers their spending patterns, if they're pulling away from services, if we're seeing some of that dynamic

over the summer that really was just revenge spending and traveling, getting a lot of that out of the system, and now they're preparing for a recession along with companies preparing for a recession. That's going to start to flow through to earnings and we're going to see some some some estimates revised down from here. We hear the phrase data

dependency all the time. What is your data dependency as you try to gauge whether there is a broadening out in that weakness of consumer spending that we saw anecdotally in the Walmarts and the targets but not that much elsewhere. Yeah, So I think what we're and have to look at is really some of those the data around whether so take inflation right, and I think what people can agree upon. Right now, growth is slowing. Core inflation is actually proving persistent,

but headline inflation is slowing on energy prices. So I think this tight rope, tight rope walk that we're going to have is really on the sense that some people that the more resilient bulls are pointing to commodity prices coming over, gasoline prices coming down, but I think you still have the shelter costs, right, You still have that housing affordability has deteriorated substantially, and so that balance that

the average consumer is really walking through. So I think you can see spending patterns in credit cards, you can see overall consumer patterns there, and then looking through in terms of the inflation dynamics that we're facing and whether some of that core inflation is stickier than expected. Kristen Supercocious to catch up Kristin Bidley the Citsy. 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 Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg.