Surveillance: Inflation Fears Shake Markets

start right here. It secuity market within a couple of percentage points from all time highs. We're doing this in the face of slowing growth in China. We're doing this in the face of a conversation about higher interest rates at the Federal Reserve. What is the resilience of this market, says you, Laurie. Look, I think the resilience of the

market has been absolutely remarkable. UM And I think you know one of the things that we noticed last week, frankly, as we went through our names the big banks, we're talking about how much cash consumers have sitting in their bank accounts. Um, and so when we think about just the underlying appetite that's out there from both corporates and consumers. Um. Just that strength of the balance sheet is something that you know, really has made talk of a growth scare

very premature over the last month or two. So we've got some clear speed bumps. The central banks are one of them. Um. But at the end of the day, the balance sheets are fine, the consumers are in great shape, the appetite is very, very healthy, and I think that's allowed investors to look through some of these supply chain issues. We're talking about, the supply chain issues, Laura, I'd love you to pick up on that. In your recent note, you said there are signs in the data its supply

chain disruptions are peaking. What are those signs? So you know, one of the things we've been talking a lot about, Lisa over the last few weeks is if you look at the relationship between global COVID cases and freight costs, global COVID places tend to be a leading indicator, a very loose one by about one to two months, but a leading indicator nonetheless, And guess what, a couple of weeks ago we actually started to see some very modest declines and freight costs. So that's one of them. It's

still very early days. We'll see if it ends up sticking, but that's one of the glimmers of hope we've seen.

Some of the others we've seen, frankly, are looking at regional fred surveys, where we've looked at indexes on delivery times and backlogs um and orders that are hard to fill, and we're not seeing outright improvement on those indicators yet, but we are starting to see a modest improvement in the rate of change, so growth that's a little bit slower, and that's something we talked about with freight costs about a month ago or so, that we had started to

see the rate of growth start to come in. We start we're talking about that with global COVID cases over the summer. These rates have changed. When they start to improve, that's a necessary precondition to getting outright relief, and we think that we're starting to see that in a lot of different parts of the data. LORI LORII. Then does this mean that it's time to start buying a consumer discretionaries, industrials, materials. So look, we're actually neutral on all those sectors. We

never went to a full on bear tilt. We did downgrade Materials at the beginning of August because we noticed that the rate of upward revisions was starting to decelerate. What I've told people is that if you want to bottom fish and one of those supply chain oriented sectors, I think materials is probably the safest place to do it,

just because the valuations there are already pretty cheap. Industrials and consumer discretionary are still looking pretty expensive in the big cap world, but Materials has had a nice valuation story all along, And I would just add Leasta, you know, one of the things we've been talking a lot about the last couple of weeks is if you look at industrials and materials, the rate of upward revisions has just

fallen like a like a rock. I mean, it's just got straight down, and we're actually seeing levels of upward revisions that are consistent with bottoms in that particular indicator when you're not in a big recession. So, you know, we do think that there's a good chance that a lot of these supply chain pressures are baked in. Lauri, the gloom crew is taking a view of earnings is being problematic. You flat out say they're wrong. You say there's a positive tilt sector to sector, company to company

with your analysts. Discuss that when you listen and read your analysts, what are you listening and reading? So it's a it's a great question, Tom, And once a quarter we do a check in with all of our analysts. We basically survey our analysts across the industries we cover, and we just say, what do you think in terms of performance for the outlook for the industry you cover, but also what do you think about fundamentals, policy, valuation UM.

And what we found, basically, Tom, is that they're still looking for a pretty strong outlook over the next six to twelve months. They still have very favorable views on the fundamental backdrop, very favorable views on cash deployment, which is actually the area they're most bullish on. The valuation for us have gotten a little bit better since the

last survey in June. They're cool on policy, they're concerned about margins UM, but on balance, they see pretty good indicators over the next six to twelve months, and we have to listen to that. That's the boots on the ground feel, even on supply chain issues. Tom I was frankly floored that only a handful of them told me it was a major problem for their industries. Most of them were in the moderate problem camp, and a lot of them told me it simply wasn't a relevant issue.

End next year, what's the number. So we're still at fort hundred, which from where we are today is about a nine percent gain. You know, it's funny I get accused by some investors of being too barish. I get accused by a lot these days of being too bullish. It's a pretty trend like forecast. It's not heroic um, but we do think that there is room for this market to continue to move up in the year ahead. It's going to be a slower pace than what we've seen.

We're removing some of that accommodation. But nonetheless, we do think the bones of this economy are very strong. And I'll tell you, John, I have not heard anything in the last you know, sort of a couple of weeks in this early part of recording season that's made me change that view. Laurie, Thank you constructive on the year ahead, Laurie Canvassin and that of MBC Capital Market. It's larly great to kick off the week with you. This is

a really really important conversation. It's two parts. It's the institution and it's the chief economists. The institution is a conference board, and they really look at the granularity that's out there. Think Ellen Greenspan. Dana Peterson joins us this morning. Dana, I love what you say. Watch what they do, not what they say. You're fairly optimistic on consumption. Yes, we are, certainly.

We look at the August and September retail sales data, even abstracting away from higher prices, consumers came back and they spent even amid the delta variant. Now, unfortunately, the better readings in August and September won't make up for the abysmal reading that we saw in July. But again, July was really the start of the delta variant. And we when we look at the data regarding infections, they're starting to come off um and so we have very

good momentum heading into the fourth quarter. We had very good momentum of the fourth quarter. Is that in is that in the central bank? Few right now? Is the Central Bank looking at that saying everybody calm down? I mean, is that where you go? The central banks? The Feds got it right well, I've think the Essential Bank is saying, look, we really need to watch the data here UM and certainly when we look at consumer spending heading into the

fourth quarter, it could potentially be constrained. Not because of lack of demand. There's very strong demand for buying things um and also rising demand for services. Indeed, many people will be traveling. But it's really about inventories, inflation, and

transportation costs and also labor costs that have risen. UM. Inventories are clearly lean because you're having issues producing amid the delta variant, and also once you move those products across the seas, it's really hard to offload them and then move them by trucking around the country. And certainly prices have risen pretty aggressively, and we can talk about that,

but certainly that may put off some consumers from buying. Meanwhile, data, I uh, We've got Mr Blanche Flower over at dart Math screaming at the screen, probably watching that, saying, did you not read my report? You have read his report saying that typically one consumer confidence rolls over to the sense that it has it does portend recession, and you

kind of dismiss it. Why do you not necessarily take his point that when you get such a decline in consumer confidence that is a telltale signal of something negative happening in the economy. Sure, well, a few things, and we did look at the report and we did not ignore it. First off, and uh, he's right. There are many instances when you see a dip, a significant dip and the expectations gauge within our consumer confidence report, and

that did follow recessions. However, there were at least six or seven, maybe even eight other instances where you did not see a recession. Um. Also, it's very important to look at the level. So the level of expectations is right around where we were back in seventeen. I don't remember anyone really thinking we were going into a recession, other than the fact that, well the cycle has been long,

but we know cycles don't die of old age. Um. And then also when you look at the details beneath the expectations gauge, there more people who were expecting economic conditions and just general conditions to improve relative to those who think things are going to get worse. So those are our views, but data, I'm atty fast does the economy have to grow given how much debt we have given how much we've leveraged up this economy and are

relying on consumers to deploy their cash. Sure, that's a great question, but also when we look at the U. S economy, we're probably gonna grow around five and a half six percent this year and then probably slowed to four And even if we slowed to three or even

two percent, that's still really astounding. The economy grew on average two point two percent in the decade following the Great Financial Crisis, and even just before the pandemic, we're growing around two and a half percent, So if we slow to three percent next year, we're still growing well above potential and even above the pace that we saw prior to the pandemic. And just speaking of debt, certainly you did have a lot of fiscal stimulus that padded

people's um wallets. But when we think about what people use that money for, a third of it was saved, a third of it was invested, and then only a third of it was consumed, So that means there's still a lot left for people to spend on. Then I want you to go back to the heritage of the Conference Board, truly back decades folks to World War two and and on from that, you see the glass half full. What is the major misjudgment on Q four, Q one,

Q two of next year? Sure, I think that well, certainly we're going to have the whole dead ceiling and budget crisis debacle issue return to US in December, so there's still risk of a shutdown. I think inflation really is the biggest issue that we're looking at. We're expecting that prices are going to continue to rise on the year on your basis, through the end of the year, and they are big questions about how quickly they slow. There's some factors that are just not going to go

overweight overnight. Indeed, when we look at the semiconductor shortage that's driving up prices for cars and high tech goods, that's not going to be resolved overnight. And certainly when we look at other areas of inflation, um rents, they were depressed throughout the pandemic, so we should expect that they're going to rise again and that's going to put upward pressure on core inflation. So I think inflation certainly is one of the bigger risks that we're seeing in

the short run for the US economy. Danna just brilliant as always, really brilliant. Dinna paidis in that of the Conference board on this economy right now, there is no debate Tomorrow in the eleven o'clock hour. I will brave it once again. John Farrell coming along to hold my hand. I'll get my booster shot. I've been actively waiting for that. I took the first appointment I could get us the only reason. Joshua Sharfstein joins us this morning by Steen

at John Hopkins Bloomberg School of Public Health. Joshua Sharfton, when we were kids, getting a booster out wasn't even discussed. It's just something you did. Why are we having this discussion, Well, because at the beginning, we didn't know when it was going to happen. You know, most times the entire series is well known before the vaccine is you know, approved. Here, we had an authorization that happened because of the speed that was necessary, you know, thinking there probably would be

a booster shot necessarily, but just not when. So then suddenly when it pops up, then everybody is kind of trying to figure it out in real time. Usually this would all happen, you know, well in advance, do you have a clue the duration of two vaccines and a booster shot? Is that a duration out one year, out five years lifetime? Um, well, we don't know because we don't have the time, but it's most likely, you know, pretty pretty significant. I would think that for that particular strain,

it's going to be you know, durable. You know, most people are saying at least for a couple of years. The real question mark here, though, is whether there is a mutation in the virus that makes the vaccine not so good, in which case it's not really a booster, it's a different vaccine against a different form of the

virus that we might need. Joshua, there is an issue right now, not only of the developed world, which frankly does seem to be on the decline when it comes to the number of COVID cases, thankfully, but the rest of the world that might not have access to vaccines. Are the big biopharmaceutical companies doing the best that they can in your view, to increased distribution and supplies to the other countries that have not yet really seen penetration

with vaccines. Now, in my view, no, they're not, and it's really appalling unfortunately, and particularly I think the criticism from Maderna has been pretty intense because the company is selling just a very very small amount of vaccines, sometimes at high prices to low income countries, and there are many many parts of the world that have very poor

access to those two very effective vaccines. I think fies Are is considered to be doing somewhat better job, but really what we need is real manufacturing capacity in those countries so that they're not dependent on exports, and in the future they can use that capacity if there is another strain that needs a vaccine, or there are other vaccines that need to be made. And you know, the the government really funded the technology here in many different ways.

It is really appropriate for that technology to be transferred effectively. Where is the burden here? Should it be on the public sector because this is a global health issue and it's not just a humanitarian one. It's also about health to get the the the the COVID under control around the world. Or is this really on the specific private biopharmaceutraceutical companies. Well, there's such a mix in terms of how this whole project work. I mean, the technology was

supported by you know, investments from the public sector. The actual um vaccines, you know, only possible because of guaranteed purchases and in the upfront investments in the case of Maderna, from the public sector. And so that's where the technology is that you can't say to the public sector, will you know, go fix it without the fiser and Maderna vaccines,

those are public sector creations. And so it is really you know, all of our responsibility, you know, to the world, not just to be handing out vaccines, but to be helping them grow the capacity to make them themselves. We all have our way of measuring this natural disaster. Dr scharf Stein for me, I look at one statistic in one of the papers, and the good news is it's ebbing down number of deaths per day. Do you have a target for number of deaths per day in the

United States of America? Well, you know, I'm really looking forward to it going under a hundred. I mean, we're still at like I'm us, yeah, it's it's really high. I mean I think that, I mean, I'll feel like we're in a much better place when we're at under a hundred a day, which is totally possible, you know, I think with with with vaccination and with a little bit of passage of time here, you know, but but we really do have to, um, you know, keep pushing

forward just quickly. What is the efficacy of the g n J vaccine after six months? What do we founding out about that? UM? We're finding out that it's I think kind of holding steady in the seventies somewhere UM, particularly for hospitalization, and that is not as good as the other vaccines, which is I think what you're hearing at the FDA Advisory committee. So why why are we still using that here in America? Then? Doctor? Why are we not just pushing that one to one side and saying, look,

the efficacy is not there. Why keep using it that? You know, that's not an unfair question to ask. I think that part of the reason is that it looks pretty good with two doses. So I think that UM and and that second dose maybe from one of the other vaccines. It may be that the FDA will say it's it's fine to you know, use a booster with the different joes. But you're asking a good question, you know, why start out with it? If we have these other vaccines.

I'll give you one other reason, which is that there are some people who are allergic to some of the components of the m R and A vaccines they cannot take them, in which case, you know, the Johnson Johns of vaccines did alternate. Thanks for that perspective, appreciate it. Just with Chef staying there on an important conversation hits almost we start to find out more and more about

just how effective these vaccines are. Six months after the first shot, the second shot Bloomberg surveillance across this nation and around the world, Colin Powell did at eighty four. There are any number of wonderful guests we could line up in the scramble to speak of the general, not a five star general, nut general of the army, as so many others, including one of his heroes, George Marshall.

But nevertheless Colin Powell, we get Bobby Ghosh. And this is a wonderful thing because in journalism he's the one who actually did it. Others talked he lived in Baghdad in the Red Zone for Time magazine, and it wasn't the red zone because of Time magazines cover. It was the red zone of danger. Is well, when did you first come directly in contact with this unique general. Was

it Iraq or was it before? Well, I first lived the consequences of of some of his decisions as a journalist in Iraq, but I didn't actually encounter him until after I had left the country. I think it was two thousand and eight or two thousand and nine. I

was still a Time magazine. He had come to an event that Time Magazine was was hosting, and we spoke briefly about Iraq and everything that unfolded there was It was not the best place for a deep conversation, um and of course we were surrounded by a lot of other people, so I felt like he couldn't be as

candid as he might have been. You were candid not only with Nate Rowlands years ago about the chain you never racked, but before that, this distinction at the time of General Powell's courage, in his lack of naivete versus others like Mr Bremer as well. How how was he listened to as we went into Iraq? Well, he was given the the impossible task of trying to defend the decision to go in there. And then once we were there, and once it was clear that the weapons of mass

destruction were not there. He was in an impossible position of trying to then explain why we were we were still there. Um. He was not an an insider politician like Bremer was. He was a soldier first and foremost, and and the sense I got from him was that he was deeply pained by the military losses and the loss of prestige that the United States military had had to endure because of that decision. Um, you know later on, as he would explain in his in his autobiography, this

is something that exercised him deeply to the end. He remained although he joined politics and he became a powerful figure in Washington, to the end, he remained a soldier, and the soldiers view off foreign policy very much informed his thinking. Bobby, just to discuss though, that one moment where he did help President Bush for a president push sell Operation Desert Storm, and the invasions, the subsequent invasions

after the two thousand and one attacks. What is his legacy in terms of generals acting on the behalf of the president versus general's acting on the behalf of an independent party, which is something we have increasingly seen over the years. Well, it is I guess a cautionary tale for those who come after him. UM, be aware of politicians, I suppose is the is the simplest way to think of it. And it undermines his legacy. And it's a shame that it did at the time undermine his legacy

as a soldier, as a commander. The power doctrine that he sort of author during the First Gulf War was then undone during the Second Gulf War, the invasion of Iraq. Um. I think any military commander who has sort of then after come into politics will have been and will continue to be deeply aware of the risk um of being associated with a particular brand of politics. Um. And when you when you give up the uniform, you give up the neutrality and you have to live with the consequences

of General Powell is is dead. Also at a very crucial moment for the US is intervention, or perhaps lack of intervention in certain places in the world. There has been a shift in foreign policy away from international intervention to a more domestic policy. How did he figure into this transition that we seem to be in an ongoing way even under President Pidon Well. I think if it felt like he was a man out of time he

was he was an old school Republican. He believed in uh, small government, he believed in in in low taxes, and that sort of republican. He was out of place in the sort of hyperpartisan, uh social republicanism that you see now. He he didn't have sort of He he didn't want really to get involved in the in the sort of dirty down, sort of messy um ideological battles that we're seeing take place now, which is why he eventually left

the party. He was deeply pained, it was clear by the by the instruction on the sixth of January, and then he decided that that was it. He didn't want to be part of the party anymore um and became an independent. I'm sure that that brought him a lot of pain right at the end of his life. Edward Lerby's classic book on FDR The Commanders, talks about the generals, and there was Ike after the war drafted aggressively to be a presidential candidate. You move forward decades to Barack Obama.

In the middle is Powell, who was really never drafted to be president? Why not? I've often wondered about that, And there was a moment when it seemed like it might be possible, um, but he was reluctant himself to go that far. Um. You know, Obama came, came, and and and and went to the White House and became the sort of the figure that represents the possibility of minorities in this country. But until that, that that time we forget now that Colin Powell was the first of

those figures. That when he became Secretary of the State, he was the first African American to to to reach that role and was an inspiration for everyone, including Lloyd Austin. I mean, the fact is the second name of what you want Secretary of Defense Austin and so many others of so many different ethnicities and race, it began with him. Is that safe to say? I think that is very safe to say. So that his legacy in the military

is enormous, um, you know. For but for that one blip with the war in Iraq, unfortunately it's a very big blip. It will always be an asterix in any description of him going forward. But I hope we don't forget that there was a there was a time when he represented the best of this country. Are you gonna like it? In New York. Bobby ghost Folks has have been living large in London here for for many different weeks and years as well. You're moving to New York right,

it's day one. I'm this is day one in New York days. I'm Gonada home. We are hugely advantaged to have you with us on this important day. Bobby Ghosh with years, I should say, in Baghdad for Time magazine, and we are thrilled he's with Bloomberg Opinion. 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 some ascribed to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m