Surveillance: Inflation Elation with Tallbacken's Purves

Katie Kaminski. She's chief research strategist at Alpha Simplex. And what's so important is you can't pronounce her focus at the Massachusetts Institute of Technology stochastic processes, stopping rules, and investment heuristics. I've aged saying that Katie joins us now with an encyclopedic knowledge of math and trend Katie, your your work with Andrew Lowe and all the others around trend based analogy, says leads us to one single question.

Have we broken the bear market trend? That's a really good question because what we have seen lately, which I think is the most interesting from a technical perspective, is that we've seen signals really dissipate in the last two to three months, and so it really feels like an you know, an inflection point. Right now for us, we're

still seeing sort of a net short but it's very weak. UM. That kind of indicates that we could go either direction depending on what occurs, and I think yesterday I just kind of showed that we might be going in a better direction than people have thoughts. Katy want to go inside baseball to Monroe Trout and asking tell Paul Wilmot and the others from years ago, mostly out of Imperial College. The raging debate is their value to volume analysis? Do

you study volume? I don't. So volume is a good indicator to understand whether or not you can trade a market and whether or not you're sizing is appropriate, but unfortunately a lot of indicators of volume have been difficult to document empirically UM as predictive UM. There may be exceptions to this, but I think volume is still a key metric because it really tells you something about whether or not the trade ability of individual markets is there UM and that's how we tend to think about it.

As you know, futures quants, Katie. Liza McCormick of Bloomberg News wrote a story about a paper that you wrote about how pigs flew at least in your world because you shorted bonds and you were able to deliver return or more in the beginning of this year, the first half of this year, have you closed that trade out? Are you still trying to short bonds here? Especially after

the rally. So that's a good question because what we saw in June was a big spike involved we saw cross correlation spiking as well, so signals and bonds have actually dissipated. UM. The reason we wrote this paper is that we really wanted to clarify that shorting bonds is not a fluke if we continue you to see rising rates. That in fact, when you think about a rising rate environment, you're going to have to consider the shape of the curve and whether or not there may be some tactical

short signals and bonds that could potentially work. And I think this is particularly pertinent right now as we're moving from an inversion towards a slightly steeper curve. Right now, as we're seeing that could be an indication that things are getting better. UM, as long as we see that persist. Well, Katie, you say, in a rising rate environment and what we're hearing from the Federal Reserve is Yes, rates are going

to keep rising. We are going to keep hiking into next year because inflation is nowhere near where we'd like to see it. So how wrong is the market now? So I think the market is a little optimistic because I think, you know, it's always good to have a good number, to have a good print, to have something that brings your averages down. But most of us in the futures markets, we've already seen those moves and energies.

We were kind of expecting this already. So I'd say that it's a little bit as would expected, slightly better. But what that means is that there may be a little bit of optimism over the first data point that confirms what people really want, which is things to go back to normal, and the sixty, as Lisa put it, to just be back into you know, a good place, which is basically what most people are used to. Katie. One final question. A lot of people are looking at

moving averages and their eyes are glazing over. I'm a huge disbeliever in bologny like the death cross, and that can you use moving averages right now to figure out if this is a breaking of the bear market trend. So if you do use moving asages right now, I'll tell you that your signals are going to be very mixed. Um, you're gonna have a lot of indications that things look better on the shorter end, and you're gonna have a lot of indications that they don't look good and then

meet into long term. So I'd say that it's really really unclear, and the only thing we can say is a quant right now is that there is very little signal and there's room to move in a new direction. That was a very safe answered Stie Kimisky channeling George Kleinman. There and what are known as climb and exponential moving averages. You killed at Katie, don't be a stranger, Kati Kaminsky with alpha simplexy. Right now, we're just trying to understand

how much conviction this rally does have. Jim Pulson said he thinks he has conviction, which gives a lot of conviction to the conviction Chief Invested Strategies at the Luthhole Group. Jim, you've been bullish, You've been then a little bit pulling back, and now all of a sudden the melt up has begun. Something a little bit more concrete. Do you buy into this or do you see this as a head fake. I'm on to buy into it side, Lisa, I think

that a couple of things for me. I think it's at the forefront, you know, talk about the feed a minute. I think the case for additional FED tightening is rapidly dissipating. I mean, we've we've brought a real GDP growth down to a crawl um overall um. I think there's still downside moment month growth as we go through the balance this year. The past tightened policies of money growth slowing, fiscal growth slowing, dollar rising, yields rising is likely to

keep real growth sluggish. On top of that, the inflation evidence just continues to get more and more pronounced. I don't know how long it will take to come down, but clearly the momentum is down on inflation. I think by September we're going to see the FED case for why keep hiking kind of dissipated a little bit. And this is you know, I mean, I don't mean to interrupt, I'm just thinking about what you're saying, and that we

are seeing increasing evidence that inflation is coming down. The pushback I'm sure that you hear and you're going to hear it A lot is not when it comes to rent, not when it comes to food, not when it comes to medical costs, not when it comes to how much you're paying for services. So, yes, you are seeing disinflation in some areas, but it's not as broad as money

people would like to see. What gives you conviction that we're seeing the beginning of something that is going to broaden out later this year into next, Well, I think that having real economic growth, you know, zero to two percent as a as a a big part of it. Having the past economic policies that they have lags and they're going to continue to be a negative downward force.

The reason inflation peaked in the March April May period was because a year earlier, fiscal growth peaked, monetary growth peak, dollars started to rise, yield started to go up. That is about a one year lag policy has on the economy and inflation, and that lag is going to continue to be negative going forward. Also, you know, you can always pick parts of the inflation center that are still hot,

but there's a lot of parts that aren't. You know, the inflationary thrust of commodities, which was driving this at the leading edge, is now a deflationary thrust overall. You know, the core rates of c P, I P P I PC have now all decelerated year on year. In the last three to four months, UH annual wage inflation was six and a half percent on a six month basis the end of the year. It's now four point seven percent or four point three on one of those that

can't remember. But it's a big desceleration a year to date. So I think I think the debate on inflation has peaked. I think that's over and now it's a debate on how fast it comes down. And I'm just saying, you know, by September meeting, we're gonna get more claim numbers that probably will show a little more weakness, and um, I think the case is going to start to go away. But beyond that, this is really why I'm more bullish. I don't really care what the FED is gonna do,

because the FED isn't driving this ship. If I look at what's happening, We're already into a brand new easing cycle right now. Bawn spawn yields from two years to thirty years have already started to ease. The dollars rolled over. It's already started to ease. Junk spreads have gone from over six to under five. They've started to ease. Real money growth at minus three point it can't go much lower.

I think it's gonna start to improved because inflation comes down and fiscal growth has already started to go back to easing. So do you want to miss an easing cycle, Jim, I totally hear you. Yet at the same time, I also hear Federal Reserve officials like Neil Kashkari saying we are nowhere near done. We still have so much tightening left to do because inflation is still very far from our target, even if yes, it is moderating. Clearly you

are in that camp. But as you talk about all of these things that are changing, financial conditions that are easing, and the FED not being in control, does that not mean they are going to be even more aggressive to get that control back. Well. I think it's interesting how much attention we devote to the FED because the Fed's been behind the curve the whole time. Fortunately, inflation is coming down today, not because the FED lifted the funds

rate for the first time. In February this year because monetary growth, fiscal growth, dollar growth, yield growth, we're tightening all last year and that's what's bringing the slower economy and slower inflation. So now why the Fed still behind the curve but all the markets are going on the other way and starting to ease. So why should we continue to give so much dominance to the Federal Reserve? Jim? We had Kati Kaminsky on from m i t here earlier,

and it sprawls out to your Iowa state. With the rigor of mathematics and the rigger of trend, the rigger of a time series being all, when we look at the equity markets, how do we move from what's an obvious short squeeze futures up twenty one DAR, futures up two days in a row, to a constructive bullmarket trend? How do you transition from an obvious short squeeze out to a durable trend. Yeah, I that's a good point time, you know. Eventually to keep this going, well, we'll have

to decide that we're not going to resiss. So that that to me is almost becoming the bigger issue that inflation right now is are we going to resss soon. If we're not going to resiss, then I think that gives you a fundamental undertow to your sent to your point of giving sustainability in the short term, though, we're dealing with a lot of bears in the sidelines, a lot of sellers that have come out, and and we're dealing with some technical levels that are right there in

front of us right now. Two And if you break through some of those, then you're going to see a lot of the technicians that have been bearish changed tune, and that could bring some buying in that could sustain could sustain this for a while. So it's if we fail it, you know, then we probably have some downside because it's probably ahead of itself. But if we break through that, then I think you could convert some bears and bring some sustainability for a period. Jim Pauson, brilliant, Louisville.

Thank you so much, greatly, greatly appreciate this. This is what we like to do. We are driven by the research of our guests, and when someone writes a piercing note, we say, Michael Purvis of Tall Back, and we don't care that you're living large in Spain. We need to speak to you in the Spanish afternoon of a four pm with a sangria or a martini by a side. Michael Purvis joins us on optimism on the market. Michael, I would predict every strategist, every market savant, has to

come out this weekend and adjust. How did you adjust this morning? Well, look, I've I've been arguing that the recession um economic contraction was was really a pretty specultive argument that that was the argument had been made pretty substantially.

And this in the last two weeks, we've had the most important economic data points, you know, the I s M, the services I M, the non farm payroll and then the inflation yesterday come in just the way you want them in terms of affirming that not necessarily in a

high inflation, negative growth our contractionary condition there. So, um, what when you look at positioning tom um, and this is both treasury positioning and equity positioning, it is extremely barre from both on both sides there right, So the market is there's a vacuum there. And when you have those three important data points line up, you're looking at Q two earnings that have actually the beef on earning for both governors, and earnings were better than the Q

one beats. You're looking at a situation where where the market is going to move higher. So I have a tactical call up another two hundred points to hundred and my year end call like adjusted to there. I'm not saying we're completely out of the woods, but I think the the the certainly for the near terms, the water

is going to be hired out lower. Michael, how much is your conviction right now underpinned by this idea that we just heard from Jim Paulson, which is that we are at the beginning of an easing cycle, that inflation is rolling off much more quickly than the FETE is expecting that they're going to have to catch up with the market. Look, I think there's a you know, sort of looking at the R dollar features curve and looking at this, I think it's fifty basis points right now

cuts next year. I think that's an aggressive assumption here.

But from a from an how assets trade point of view, we see some stability where sort of peak hawkishness going from the speed pivot of just a year ago being categorically of us too now sort of categorically pawkish, right, that's one of the most aggressive pivots, and that policy you're going to have that asset prices disruptive and we've had that, right, So I think right now that that is in and so whether we get fifty basis point basis points or zero basis points and cuts and twenty three,

I think as long as we can look at something that's resembling some sort of stability in the bob market, that's almost more important than than you know, uh, what the average uh expectations for your dollars Michael, how much do you take a look at this idea that you had the biggest increase in food prices going back to seventy nine, Rents are surging, You see areas in nondiscretionary spending that are crimping the average American household balance sheet,

and that has yet to fully play out. How do you factor that into your bullish thesis. Well, that's a very good, very fair point, and I do think there's very strong arguments for a lot of components of inflation to state higher longer, right. But I think the question is is if the markets and the economy can sort of adjust to that, right, um, uh, they're just then I think the paces of that sort of inflationary surges are going to be very different than what we've seen

over the last nine months. Right. It's it's really the surge in in in the velocity of these inflation prints

that have really, uh, you know, disrupted the markets. If we get to a point where where you know, we never get down to two and we're sort of adjusting to a new normal because of uh, you know, reglobal deglobalization, relocalization, higher food prices, uh, energy supplied that never really fully expands, so that the well gets down to fifty bucks again, then I think you can look at a condition where where that those types of dynamics will play out in

a much slower and basis and the economy can sort of adjustice that maybe the tenure doesn't go back to two percent, and maybe that it's through to four percent, but if it stays there, and then you can have

the condition for risk assets to be supported. Is there going to be fundamental support though when we're thinking about earnings, because as we talk about these inflationary pressures, there has been a lot of warning on the more embarrassed end of the spectrum from Mike Wilson, for example, about margin pressure coming on and does I now look at an S and P five trading back at a multiple almost at nineteen on forward earnings, when are we going to

start to maybe have a problem with that denominator? Yeah, well, the earnings question, you know, like earnings bottom estimates compiled by Bloomberg are off about six and a half percent from the beginning of the year. That's unusual. Usually they go down through the year there, and the Q two

numbers have been generally pretty good. I think it's important to recognize that that if you have a high inflationary environment without an economic major economic contraction right meaning p M s and forties or thirties, right, you will have high earning strows. In the nineteen seventies, you didn't have

a great real GDP condition. You have just had a lot of inflation, but earnings growth was literally twice as high in the nineteen seventies, and it was in the nineteen sixties with real GDP average like four point three to that decade there, And I think that's one of those things that high nomenal GDP can wash away and actually helped margins for many companies, right, and certainly the top line is inflated by revenues as well, so you're not seeing a lot of margins present the other stories

the market. And again i'm talking about S and P five index level. Right. Obviously there's a lot of specific caspectors where there's a lot of vulnerability. But if you look at the income market that's being being expected by UH foreign estimates, that is that is um that is buters and and shown resilience. Michael, you know, we gotta leave it there. But on behalf of Kayleie, Lisa, me and John, I just gotta say, tomar una babida alexeion

nailed it. Have a beverage of your choice, we say to Michael Purvis in Spain as he slips into the Spanish late afternoon a trooper to be with us right now. The record has speaking to it this time. Matthew Lozetti, his chief US economists at Deutsche Bank, and you know as well, for those that keep track, he was way out front and calling for some form of economic contraction in America. Met Zettie. With the data we've seen on jobs, with the data we've seen on inflation, CPI and P

p I, can you and Peter Hooper reaffirm US recession? Sure? First, thanks so much for having me. I think it does reaffirm our view, which is that we're not in a near term recession in the economy. Certainly that the labor market data we saw last week, the jobless Clayton's data are are kind of edging higher but still at very low levels. A labor market that is very tight, I

think I'll suggest that we're not heading into recession eminently. However, I think it does point to a labor market that is still tight, wage pressures that are still well above the what would be consistent with the FEDS objective, uh, you know, labor cost growth that is, you know, about five percent, and inflation pressures which yes, they are coming down, but I think are very far away from the FEDS objective.

We saw trim mean cp I yesterday forty five basis points month on month, seven percent year on year, and so we would stick with our view that we still have a recession, that recession is likely next year, around the middle of next year, and it still remains one that is Fed induced, as as the FED continued to

tighten monetary policy. But Matt do you actually expect this to be a less severe recession than you had perhaps a couple of months ago, based on this decline that we've seen both in cp I and p P I. Yeah, we we had as a baseline what I would call a moderate recession. We had the unemployment rate rising. You know, it doesn't seem like moderate, but but two percentage points uh and something that would be kind of akin to what we saw in their early nineteen nines, about a

one percent decline in GDP. I think the key reasons for that were, One, you have private sector balance shees that are in good shape to kind of the cyclical sectors and housing and autos have been supply constrained. Um. And Three you know that that you did have monetary policy that you know would would ease next year um and and kind of help out I think on the margin. You know, certainly the inflation data this week was weaker

than we anticipated. I think it does help our call for the Fed to move rates by fifty basis points at this Timber meeting. And it's just really a question of do we see these downside Mrs Persisting. I think given the trim mean data, we continue to see inflation over the coming months. That is well ahead of the FED objective, which means that the markets pricing of the terminaire is probably too low with the at this point. So where are some of the inflationary pressures coming from.

We've been talking about food or rising at the fastest pace since since nineteen seventy nine. We've been talking about rent on a terror, We've been talking about medical costs.

How sticky are these particular elements as we see energy prices really cool off as well as some of the other issues with respect two goods, Yeah, I think the ones you mentioned are the ones that tend to be sticky, especially rent and O E R. And you know, those are the ones when you look at the minutes over the past year or FED officials comments, those are the ones that they're concerned about because they're they're sick, sticky,

they're persistent. Uh. And also FED research shows that as they tighten monetary policy, UH, it kind of pushes down housing affordability, pushes people away from hone membership into renting, and push up rental prices for a period of time.

The other point that I would I would note, and particularly for the p P I this morning, is healthcare Inflation is likely to be rising, possibly substantially for the PC healthcare healthcare gage over the next year, and that's simply a function of underlying wage pressures that we're seeing in in the hospital and healthcare sector. We think that adds about fifty basis points to core PC over the

next year. So that is an important inflationary impulse for the FED that is upcoming and we haven't actually seen yet, which is why we continue to hear FED officials even after the CPI saying, look, our job isn't done. We still have a long way to go to get inflation down to target. But Matt it raises the question of how high the bar is, meaning how high a rate of inflation are they ultimately going to be willing to tolerate. Is three or four percent going to be the new

two percent? Do we have to make that adjustment? You know, I think we heard some strong comments from Governor Waller before the last FMC meaning on that point. You know, it was noted that a prior months we had point three percent type core PC prints and he was asked of, you know, if that was sufficient, and what he said is that that annuallyzes to about four percent. That is more than double our objective, and it's nowhere near um

you know where we need to be. You can say the same thing about yesterday's course cp I print, you know, annualizes almost four So I think until you really see strong evidence that inflation is coming down, we continue to hear Hawker's comments from the Fed because they need to have credibility to keep inflation expectations in check and in order to have I think hope of getting inflation pressures back down to target over time. And as we say

over time, over what time period do you think is realistic? Ultimately, when we get into the start of when this market is betting that the Fed is going to be able to cut rates a couple of months later, what rate of inflation do you think we will be seen then? I don't think anywhere near the rate of inflation that the Fed would need to see the cut rates at that point unless the labor market has really deteriorate and

the unemployment rate has has risen substantially. If you look at policy rules, you know, any of the ones that the Fed would look at, none of them would call for rate cuts early next year unless inflation were really coming down. We're expecting you still have core PC above four percent early next year. We think it ends this year around four and a half percent, and so that's still double the Fed's objective in the year over year terms, and just very clearly that's not anywhere near the level

that the FED would cut rates. Now you're reading my mind, that's right where I wanted to go, and actually just brought up the chart. The fact is four percent inflation we can enjoy, we can enjoy nine seventy and of course a massive volatility coming out of World War two and into Korea. Mat was that the fact as America has survived four percent inflation before, will we do it now? Absolutely? I think we will see the FED, uh, you know,

achieve their objective over time. We're confident that the FED will do what is necessary in order to tame inflation pressures ensure that we don't have a repeat of the nineteen seventies. Um. President cash cars comments yesterday. I think

we're very clear about that. Um. The key QUI and I think, and it's the ongoing macro debate, is how much pain will that require in the labor market And from a growth perspective, we can we continue to think that it will mean that the unemployment rate needs to rise, and I think the recent wage data, Uh, certainly the is the interview outcome here, Matt Lozetti that David focus Landau believes in the Phillips curve. It mean is that

what we're saying. I think when you look at what is driving inflation pressure today, there's no doubt an important supply side component. It's in autos, it has been an energy, but there's also a very important demand side components um and that is the component that the FED needs to act on. It tends to be in services shelter inflation in particular. And the Phillips curve we think will work in terms of getting impression down. It was flat pre COVID.

There is some evidence that is steeping now. Matt Losotti, thank you for the brief as well. Lisa, did you think you did well? They're dodging that question. I think we digress right now and do what is unusual because the stereotype and conceit is American investors, American tourists bombarding Europe as we're seeing this year. Andrea Bonamy is a founder of invest Industrial and he is someone who believes in investing in America. He's done this in any number

at forms. And what I would say is, and he's done this beautifully here He's invested in Ducatti Matthew Miller of course, with a nodding acquaintance with that. And what is so great about Ducatti Andrea is it's right next to one of the best Italian restaurants in New York, Altre Paradiso. I love how you put that together. A great Italian restaurant next to dacatign but but but design. But trust me, it works out. I've done it too

many at times. I want you to tell us with the transactions you did today, and they're smaller and they have to do with this, that and the other thing in food. Your belief from Italy in American invest describe that absolutely. Um, what if you look at the United States for success re Italian companies is the single biggest market, It's the single biggest growth market. We have about eight thousand employees across across the group, and the United States

will remain important for US. So I think there is no difference whether one looks at political or exchange rate issues. In the medium term, the US will remain a very important market for successful Italian companies. You do something like confections, where you're making little chocolates, say I can't afford, but they're all over my house. I get you know, I get the I get the drill. But what it's about is a technology conceit of America. We think we do

technology better than Italy, better than continental Europe. Do we You do technology better, but we do industry better, and we do brands better. So I think Italy is a single largest industrial producer in Europe after Germany. And our strength will come through and UH and under growth in the other states. Will Will Will will support us on that. Andrea, I'd like to get to the Italian economy, which has been really a pinpoint, a pivot point for a lot

of discussion. But before we do the conviction to buy, the conviction to make a deal. Right now, as people talk about record uncertainty and you see money cash piling up on venture capital funds at a record pace, where do you get that conviction? You get a conviction because probat equity is supposed to invest in moments like like this.

Our our usefulness to the world is to provide liquidity when other people are are are scared or or are pulling back, and usually people pull back when they're when

you're supposed to invest. So this, uh, this investment that we've just done in the other States, which is about two and a half billion of sales to our food build up um is important and you can do it because there are moments like this where supply chain issues, exchange issues, s G issues, wars, et cetera, are are are impacting the market, and this is the moment where

you're supposed to continue investing, not pulling back. Andrea's it's safer for you to invest in the United States right now than the euroregion based on the tightening plan that holds more uncertainty. They're based on the state of the economy, based on gas prices, based on what we hear about, which is fragmentation of the euro project. In the short term, yes, in the medium term, no, as prices in Europe are

are becoming very good right now. So we will continue both both tracks, Okay, Andreas, So that's where regionally you're investing. Let's talk about company specific the kinds of companies you're putting money into. Your making food related deals at a time of very high inflation pressure for some of these companies. How do you navigate that challenge? Absolutely? So, right now you've got raw material price inflation, you've got problems with supply chain, you've got an an on shoring off off

off if you want sourcing. So there are tons of issues right now in the food industry. But if you look in the medium term, food is the biggest challenge we have on the global economy today. Security of food, safety of food, quality of food, quality of ingredients. So we're doing these two major build ups, one in the ingredients side where we have reached about a billion in sales, and one which is three enough billion, which is our

our our our private label. One of the both deals today are on those two two ends of the market. And this will will are spot on where the world is going. So it you'll see major changes in your in food and food will become a central issue also because of the droughts, et cetera. It will be it will be you mentioned technology before, it would be as biggest technology. I think, Andrea, I've got to talk to you about what matters, and what matters is you know.

I looked for your letter to me on the Taylor swift graduation at your New York University is well, this was a huge deal in Manhattan. And I think what was really missed about MS Swift speak cant Yankee Stadium to your n y U was this is a kid who never went to college. She did high school and literally, because of her claim, worked out at airport terminals. Is she studied? What was it like having a kid that never did that show up at n y U. Well,

I'm only a board member. And where you both end where you I didn't, and what you is is a university which was born out of this city. And this city is is a city which gives opportunity to everybody. And it goes to your questions about also the United States. The United States is a place where you can have opportunity. And that's and that's what then what he was there for, and that's what what I think. I gotta make some news here. I got the editor chiefess emailed me and

this is this is boring. Make some news. How do you top Taylor Swift at n y U. Are you gonna have Mario Draggy speak at n YU next year? I don't think Mario Dragon will get We'll get the same reception, not even, but I mean digging a hole for himself. He's exactly, he's a he's a good manager. But then they'll I don't think that'll that will be, that will be, That's gonna be across all of the

Italian newspapers tomorrow, Andrea. But I mean, thank you so much with invest Industrial digging himself a hole of the Italian press. 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,

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