Surveillance: Inflation Expectations With Dudley

eds and they're really hard to write. They're much harder to pull off than any of us think. And if you're lucky, one out of five, one out of seven. As residents. William Dudley of the New York Fat and of course all his work at Golden Sachs over the year's full disclosure. He was on my book of Ancient Time Ago. Bill Dudley has done that. The essay this Morning from Dudley is a required read because he lectures us on the dynamics of inflation and now it links

to the real economy. I'll get that out on Twitter. It's the essay to throw at somebody mouthing off with certitude about inflation. Bill Dudley, congratulations are clearing the air. I want to go back to Hella in the sixties, and it's real simple, Bill Dudley. You emphasize demand pull inflation over cost push inflation. Why is demand of labor so important to jump start our fear of inflation? Well, again, an ongoing inflation problem, not just the little bubble that

we're experiencing right now from reopening and lid disruptions. You really need to have pressure on resources, and pressure on resources starts with labor. It's probably a premature to expect a real inflation problem right now because we still have a lot of people out of work because of the pandemic. You look at the level of payil employment to right now compared to where we were in several before the

endemic started, were still eight million jobs short. And we're also not seeing much in the way of wage pressure. While wage pressure in the first quarter was a little bit firmer on a your over your basis, So wages for a private sector workers are only up two percent, it's hard to have much of a weight of inflation problem with wages are still quite cressive. Dr Dudley, how

do you overlay this different American economy? Lisa alluded to this earlier, but to me, it's simply an exercise and technology and an exercise and concentration of jobs growth almost monopximistic. How do you overlay technology onto the American fears of inflation in two thousand twenty one. Well, to that technology is obviously changing work there, habits in quite a way allows people to work remotely. Uh, and so we're going

to see a wholesale change in how people work. I think over the next few years you know whether whether we how fluch we go back to the predemn endemic motive working I think remains to be seen. I think the problem right now is that you have a lot of people who are not actively seeking work because you know, they have child care problems, Uh, they're worried about getting sick, or uh, they just may you know, their their businesses

may not have been reopened yet. But I think as the economy reopens, a lot of these eight million workers there are still out of work, will will will become available again. Bill, how much control does the FED still have over inflation? I think they still have control in the large in the sense that they can control how fast the economy grows, how tight the labor market becomes

and that ultimately drives inflation. They can on over in the small I mean, obviously the supply disruptions that we're seeing right now that can't do very much about that, the big spiky soft for example, and use car prices. You know, that's a confluence of two things, one chip disruptions that are limiting new car production and to demand for cars by rental companies who are starting to get

back in business again. But it raises a question for the reaction function of the federals serve, in other words, how much they can actually effectuate change or some sort of decline in these prices. Should it start to tighten policy. It perhaps isn't a first step towards tightening policy, but the Fed is going to unwind it's nearly fourteen billion dollar uh portfolio of corporate debt and corporate debt ETFs. Was this policy a template for how the Fed will

handle other additional market situations going forward. I think what they're doing with the corporate bond portfolio is pretty unrelated to the whole notion of montery policy tightening, because it's actually very small portfolio in terms of size, and it's not something that they typically own as part of their portfolio mix. But I think I would not take that decision as implying anything about the timing of paper and the timing of actually lifting off raising short community bill

does does? Does The FED, though, actually really want to see that target hit because we get a lot of talk out of the FED about how this is transitory. There seems to be this general sense here right now that if expectations of elves don't rise, you basically don't get there. You look at market pricing right now, we're somewhere around about two point three percent or so on

five year five year forwards right now. With regards to inflation expectations, that's pretty much in line with what we've seen or the last ten twenty thirty years as far as averages go. Here, expectations at least among the market really hasn't risen despite all of the anecdotal evidence we have on the ground that inflation is here and it

is real. DEFEND is actually happy that inflation expectations have risen a bit, because they were actually pretty low going into the pandemic, and this is one reason why the FIT has changed their long term Terrey policy framework to target to percent inflation and average rather than to percent inflation at any point in time. They want to keep inflation expectations better anchored anchored, and this increase that we've seen in inflation expectations, which is pretty modest as better

anchored inflation expectations around two percent there. So they're pretty comfortable with what's happening in that respect. They're probably happy about that as opposed to unhappy about that. You're absolutely right, though inflation expectations are well behaved, it's really hard to

get an ongoing inflation problem. So my view of it is it's really about the labor market tightness and the labor market that driving of wages, wages getting into prices, and then do the does the increase in prices start to affect inflation expectations. I think that that what we're seeing now in inflation is going to turn out to

be transitory. But I think there could be a longer term inflation problem just because the FEDS Monterrey policy regime is a different one now where they said that it could be very very slow to lift off from zero in terms of short term interest rate. I'm curious as your thoughts on the wage a situation, the wage inflation situation, particularly because we actually saw wages at least as far as their historical averages hold up pretty well UH during

the COVID induced recession. Here the idea here that we would see some sort of meaningful appreciation above the whatever it is three uh plus rate that we've been at. Here, is it even possible, given that we're coming off such a relatively high floor UH, that we would see a

meaningful bump up in wage inflation. I mean, it's possible, but it's hard to imagine a big wage inflame Asian spiral at this point in time, giving that you still have eight million or eight million jobs short of where you were going into the pandemic, and the unemployment rate itself, even though that doesn't suggest the labor market that's that type six point one percent unemployment rates still well above the three and a half percent rate that we reached

in February of two thousand and twenty, the labor market slack. Before we let you go, Bill, we're talking about AMC today. Is the FED responsible for frothy markets? I think the FED is responsible for creating a monterrey policy that's very conducive to lifting financial asset prices, but you know, the AMC phenomenal. I think it's something that I would not lay at the feet of the FED. Well, Bill, we'd like to get more of a quote from you than

that on AMC. Right, Bill, do you think regulations got to step in here? I mean this is unusual, to say the least. Well, I think you know this is a question where you know, I think people need to think about what's fundamental value? What's the stockbrights relative value? You know? So so buyer beware. I guess that's why Bill Dudley, with advice to Romaine Bostick, will run their tap this afternoon. Budley Bloomberg Opinion comments, I can't say

enough about his essay today. I'll put it out on Twitter here in a bit right now, Glenn Hubbard joins us. He is, of course the former dean of Columbia Business School, which many of our employees have attended, and I must say, with his esteem public service to America, Glenn, we're so happy to have you with your bachelor's degree of Florida, knowing that Bill Dudley will come along with his bachelor's

degree of Florida. What's in Florida economics. I think it's hugely misunderstood in the northeast of the esteemed history of Florida economics talked to us about Central Florida. His Bill Dudley would talk about the New College. Well, I had a great experience. I was an engineering student and then any con student. But I thing but great teachers and

great experiences and a wonderful part of the country. I could really say, folks, you know, in all my experience here, Florida economics is a general statement, is way way under rated. Glenn Hubbard, you are not in inflation East. I want you to describe for our audiences fear of inflation and what the true inflation eastas have wrong. Well, it really gets back to supply and demand, Tom, and it's a

race between the two. We know the economy is reopening and demand is certainly there from very a comminative fiscal and monetary policy. Supply has been slower, with bottlenecks and some issues in the labor markets like unemployment insurance benefits perhaps being too generous. I think, on balance, it's not that I think the FED is necessarily wrong, but they're

not managing risks. Well, I do think there's more of a risk of an upside to inflation, and I think the FED would be wise to at least acknowledge that risk more and begin it's tapering and discussions of tapering. You mentioned Florida. I'm from the South. There's an expression fixing to do something. Well, if FED needs to stop

fixing to do something and actually do something. So can you draw the distinction between good inflation and bad inflation at a time when food prices are searching the most in more than a decade. Well, I don't know that anything is really good, but the transitory inflation would be simply the bottlenecks occur and we have supply chain disruptions related to the pandemic. Takes a little while for that to work through. Relative prices can change as people's preferences

change across goods. The real concern is longer term, persistent inflation. And I do get a little weary of hearing the FEDS say, well, we have all the tools. Of course, they have all the tools, but they had all the tools in the nine sixties two and and it got

out of hands. And I think you you really need to watch those pressures a little bit more carefully than are being watched right now, Professor Hubbard, we're just getting a word from political reporting that Biden wants one trillion dollars in new spending in the infrastructure bill, countering some of the Republican offers that include less than three billion

dollars in new spending. Why do you think that this is excessive given the fact that we still have a lot of people unemployed and wages are still a key concern, particularly on the lower wage spectrum. Well, I do think it's successive. We don't have output gaps. If I can use econ speak for a minute, of the size the Biden plans identify. I do think we need a real infrastructure package, but a lot of what President Biden is

proposed is really more social spending than infrastructure. And I think the economy does need infrastructure, and even the size

of that could be open to debate. What worries me about his physical plans is that if you add them all up, from the rescue plan, the job's Plan, the Family's plan, they're very, very large and largely unpaid for, despite despite the red and they are indeed a transformation and away from work and dynamism towards social spending, and both of those things worry me, and I think worry me in the public. You know, there was a great rap video about ten years ago UM that showed Caines

versus Hyak in a boxing match. But a decade on it seems like Cain's one uh in a knockout Hiak. I mean, there aren't any Austrian economists left, it seems, and even the Kynesians are have become conservative and traditional. M M T is the new way to think is there has there really been a sea change here? Well, I'm not so. Strike actually use that video of my political economy class to talk about the pandemic. So basically

the Keynsie response was the big aggregate demand stimulus. But a lot of what is going to happen in the economy and is interesting in the economy is how we're going to adapt, as we received from co Good, that's a high ache In story. The way to do that is on the ground, high X quote, man on the spot, person on the spot of really figuring that out. So I think we're gonna need a mixture of the Kynsie response and the high achie In response. And I don't think we want one without the other. We uh, we

all love the economics lesson. We saw on Ferris Bueller's Day Off where he talks about voodoo economics. UM, top down stimulus. What we're looking at right now in Matthew Bosler's Great Big Take UM from last week you're quoted in that story is an attempt to stimulate the economy from the bottom up. Is that, UM a smart way to do it? Well, I think we do need measures that maintaining incomes. I do think we're calling too much stimulus.

What the economy really needs right now is a way to help people adapt and that support for the jobs of the future, for the businesses of the future. And it's very different then the kinds of plans that President Biden is proposing. Unfortunately, the opposition is not proposing much either, but it would really be about jobs in the future. Greg Glenn, rather, we're short on time. I want to be direct as I can. We're getting new pushback in Congress.

According to Greg Villier on text increases, can we move this forward without text increases or do you just assume it's got to happen? Well, this is what you mean by this? If you mean a modest infrastructure plan. Probably, if it's true infrastructure, you can borrow for much of that and use user fees. If you mean the very large spending bills the President is proposed, you would need taxing pieces. Unfortunately, what you would have to have to really pay for that would be something like a value

added tax, and the President hasn't talked about that. The tax increases he's proposing are much too small. Glenn Hubard, thank you so much, greatly, greatly appreciate it this morning. Right now, we are thrilled to bring on the equity market someone who's absolutely nailed at Julian Emmanuel B. T i D, Chief Equities and derivative strategist. Julian, good morning. I'm gonna cut right to the chase. We've had a rotation. One camp says a rotation continues. Another camp says, go

along the big tech. Which is it? We think the rotation continues if you look at it, regardless of what the Fed does or does not do. Says there doesn't say how many thinking about sweet here. The U. S economy is going to grow somewhere six seven eight percent this year. It's tracking for ten percent this quarter, and that to US means value continues to outperform. We're gonna do a headline right now and we'll come back to

it in a moment with Romayne Boston AMC Entertainment. They filed to sell up to twelve million shares that's on a float right now. A five million, so you can take twelve and divided by five and gives you a sense of it. We'll get back to that in a moment. On the stock that hasn't a rich little story, Julian Emmanuel, what's your original store in this market right now as you're right up for the weekend after the jobs report, what sectors, what part of the market are you looking at? Well?

So for us, the story has been if you look at it, you've got the meme stocks moving, you've got this fascination with inflation. But in reality, the SMP five hundred index has essentially gone nowhere for the last two months. Now. Normally, the wisdom has it you never want to shore a dull market. You look at the last three years or so, and actually, in fact, when the market gets this quiet, basically you know day to day moves in the SMP five hundred of three, four or five points on a

four thousand plus number. Uh, it really says it's time to be a little bit more defensive. As I said, we like the value stocks. We're tilting more defensively here consumer staples with pricing, power, healthcare, and actually reads which are going to do well if the environment stays inflationary. Julian, are you telling clients to load the boat on AMC.

That's a much more difficult call, Lisa. I think when when you look at it, the options market is telling you that the yellow flag is coming out once again. We go back to January when you had that first top in the meme stocks. We all know the video game retailer, their option implied volatility hit a thousand percent. That was the top. Worried about six hundred and fifty seven percent um in in the movie theater stock today. Uh,

this is a warning sign. This speculation is intense. Uh. And as we set back in January, rocket ships go back to their lunch pads. How do you understand the trading activity here? Is this Reddit traders sending messages to their grandmothers saying load the boat on a m C. Or is there another phenomenon happening here that's either more tied to the fundamentals or more tied to institutional traders. Well, it is a more magnified version again of what happened

in January. Is that basically, the people gathering on social media have plenty money in their accounts, They paid their taxes with winnings from last year, and are pushing selected stocks. The group is narrowing, um, but it is very much a social media phenomenon. But the other thing about it, is strangely enough, is that the shorts really haven't learned their lessons from January. So if you look at it,

the short interests continues to rise. It's not what it was, but it's still, you know, really too high given the price actors dueling quickly here. I don't want to get you in trouble with the General Council B T, I G. But are you seeking regulation of what we're observing and things like AMC. The thing that ties all of this together is the fact that margin debt leverage is at all time highs. And generally when we see that, obviously the indiceason near all time highs. Uh, it's almost inevitable

that the government will step in at some point. Did Julian thank you so much, Julian Emmanuel with b T I g less nerdy than me is Jennifer Neusoh at John's hop Could Center for Health Security, and she joins us right now. Jennifer was talking about this last night at the dining room table. We completely have missold the triumph of American virology, American microbiology, and our pharmaceutical business. It is stunning. As President Biden said, what's occurred. I agree.

I mean, we are living a much different life now than we were a year ago thanks to science, and not just thanks to science in the last year, but thanks to you more than a decade, several decades where the science. This is why we invest, This is why we sustain, This is why we do this because one day it will be necessary, will be it will be important.

Dr Nutso, can we codify the scientific advancement in a social passport, a vaccine passport that people can use can take to go places and say I am not at risk of getting COVID or frankly that high risk of distributing it either. Yeah, so it's a really tricky question.

I know people are very eager to do that because we're all eager to get back to normal, and for those of us who you know, feel like we've done our part, We've went out and got vaccinated, we feel like we should be entitled UM to gain access to places. I fully expect that private businesses are going to require UM vaccine proof, provided their governors don't prevent them from doing that, but that they will, UM you know, at some point start requiring vaccine proof to allow people to

you know, go to concerts and things like that. But it is a bit tricky because there are people out there who are hesitant, and their their hesitancy is not without reason. There this is a new vaccine UM. You know, they maybe don't have the luxury of spending all day like I do thinking about these things, and so they still need to you know, be convinced of the benefits

of vaccinations. And you know, I do worry about prematurely rolling those things out before we've had really a fair chance at winning the hearts and minds of people and showing them why these vaccines are so liberating and hopefully tools that they will willingly accept wait to be cually more in favor of parents than sticks UM, and so you know, I expect that will probably be there at some point, but I do worry that rolling them out too quickly could create a culture war which will entrench

people in their opposition to it. So are you saying that the main reason against the main argument against vaccine passports is an emotional one. Is basically that you need to cater to the way that people feel about the vaccine first and then deal with the mandates later. No, I don't think it's an emotional one. I mean, you know, first of all, people's hesitancy is not purely about emotion. It is also just that, you know, we haven't fully

approved a number of vaccines. I expect that that's going to come soon, but you know, there still needs to be an educational component to it. It's more really about pragmatism. Um. That. So there's also some access issues, and UM, we know that many of the people who haven't yet been vaccinated, it's not because they don't want to, it's just that they haven't been able to, and in part because it's harder for them to get they may not have time off from work. That maybe, UM, not as many options

in all places where people live. And so you know, we also have to be worried about what we restrict people from doing if they haven't been vaccinated, and whether that's worth it in the long run. I don't care about the emotions as much as the pragmatism, and I worry that if we create a culture war or roll these things out too quickly dot that we could actually damp an enthusiasm for vaccines. Doctor, what what danger do

the anti vaxxers present? I mean, if you end up in a situation where sixty sev of the US population is vaccinated, are they threatened? Is that majority threatened by a minority that refuses to get the shots? Sure? So so far, the answer is they are dangerous to themselves. The people who have not gone vaccinated are dangerous to

themselves because they risk getting vaccinated. And so interested in reaching those folks and convincing them of the benefits of vaccines because I don't want there to be any additional loss of life. Of course, you know, down the road we very much worry about. You know, as long as this virus continues to circulate at high levels, that there is the potential for mutations that could overcome vaccines. But so far we haven't seen that. So right now, at

least in the United states. That is less of my concern because our case numbers are falling. My main concern right now is making sure we protect people so that we don't see additional loss of lives, so we don't see schools closed in places where schools had been open. Um. You know, it's it's about getting back to normal. I'm not giving up on people. I still think we can reach them. Jennifer News, So thank you so much, greatly

appreciate it. With JOHNS Hopkins this morning on this story unfolding and you heard the President there, it was great optimism about the summer. 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 and this is Bloomberg