Surveillance: Inflation Outlook With Fed's George

It is a beautiful place with mountains that only Michael McKee has climbed across the lake with a moose in the background in the lodge. I've had the privilege of being there for some very important meetings during the financial crisis, but this year is absolutely unique, run by the Kansas City Fed and they're wonderful and interesting. Esther George Jackson Hall will be virtual meeting to begin our coverage are Michael McKee spoke with Esther George and they began on

the framework at hand. Let's listen. I will just offer you from my perspective that this has been I think a useful process. It's been a process that really asked of ourselves to look at what we've learned over the past decade, to try to think about how the economy may have changed, and importantly, to think about how we communicate to the public. So the process in and of itself, I think has been a useful one, and I will leave to the Chairman to talk about what we've learned

from that. Well, you've been considered an inflation hawk. Where are you on this idea of average inflation targeting? So my focus on inflation, Mike, as you known, is to be true to our price stability mandate. UH that are two percent target UM really has to represent what's happening in the real economy. And so as we think about ways to better communicate to the public, UM, I've never thought of two as a ceiling, but to really stay

focused on what anchors inflation expectations in the economy. So from a communication standpoint, UM, I think we will be talking about the kinds of things that help us do a better job of achieving our objectives. Wall Streets betting, or at least many of people on Wall Street are betting that the FED will change its forward guidance in September. Some of your colleagues say, don't need to do that.

Yet where are you so? I would agree when I look at what the Fellow Reserve has done since March UM in terms of interest rate policy, in terms of asset purchases and the credit facilities we've had, I think trying to gauge what else does the economy need is probably premature. I think we are beginning to see signs of a recovery. We're beginning to see where the economy may have shortfalls, where it may be doing okay, but

that is going to take some time. So thinking about what those other things are I think has been a useful discussion. Whether it's time to activate those things is something we'll be debating leading and run up to your conference and GEIRMYN. Powell's speech, there's an awful lot of discussion about inflation going on on Wall Street and in the financial community. Um, do you think that the all the stimulus that's been pumped into the economy is perhaps

an inflation danger down the road? Well, As a central banker, I think we always keep our eyes on inflation and what impetus may come to that. I think importantly what we see today are really generally deflationary kinds of forces. So until demand comes back, until we see the economy regain its footing, it's hard to see in the near term.

But as you point out, there is a lot of stimulus that may be out there at the point that the economy regains its footing, and we'll have to look and see what impact we see through prices at that point, but today is probably not that day. Well, let's focus on your district. The district, how would you describe the economy there right now? So I think we see some

encouraging signs. Uh. This region, of course, has experienced the virus in different time frames, in different levels of spread over the last five months, and what we see overall is there has been some improvement in the job market. We have seen some businesses that are beginning to come back, but of course that's coming back from a very low level. Particular to this region, of course, things like agriculture and

energy are very prominent. We know the farm sector has been under some stress for some time with low farm incomes, and this episode puts further stress on that, causing the farm sector to have to rely more heavily, for example, on government supports. Energy too, with the rapid decline in oil prices um productivity and the producers had to lay down their rigs. Uh. So those two sectors in particular in our region already under some stress. It will take some time, I think for them to come back. I

can ask you to expand on the labor market. What are employers telling you right now? Do they need more people? Can they find more people? Or are they just sitting back at this point and saying we have to wait and see where the economy goes. So we hear a variety of things that won't surprise you, but very important.

As we've talked to our contacts in the region. Again, it is often a function of the sector Therein if they're in a part of the economy where they're dependent on air travel, dependent on entertainment or dining, Uh, they are struggling and having a harder time and bringing people back in those sectors looks to be uh some time away. We also hear that some are having a hard time bringing people back because they felt like they were competing

with some of the jobless benefits. Whether that's true today UM is less clear. So there are a number of dynamics that are affecting that labor market and that of course, is why it will take us some time to see where does all this shake out in terms of how that labor market heals and how we begin to see growth resume in the economy, as you George of the Kansas City Federal right now, as we look to Jackson Hall right now, as we look to the American economy.

Peter Hooper has provided extraordinary leadership at Deutsche Bank to do the harnessing and economics, which is to put a team together where you lean forward and it's anything from the words Seravellos in London and Ellen Ruskin of course over to Matt Lozetti and the US economic team as well. Peter, how is your team adjusted in the last number of days? Are you marking down Q three in Q four economic growth? Well, Tim,

we have not yet marked down growth. The numbers have actually, until yesterday's UH confidence slip numbers have been coming in a bit stronger UH and despite the setbacks on on the virus side, we we were inclined to mark up our second half numbers just a bit in light of data coming in now had an interested in discussion on the fiscal side. Obviously, if we don't get a resolution, we're assuming one and a half trillion in in fiscal support coming along here soon. If that doesn't materialize, and

it's it's a very different picture. But assuming we get the phisical support, the numbers so far say that are are five and a half percent growth number declined for the year, maybe a little bit too weak. Things looking just a little stronger, and and today's durable goods report sort of shaded slightly on that side as well. When you talk about the fiscal support, it comes ahead of that jobless claims number tomorrow that is expecting to be expected to be the twenty third reading UH one million

or more out of this past twenty four weeks. Where are you seeing unemployment ending the year at this point, given the ongoing announcements of layoffs that we keep hearing from major companies, Lisa, we we think it'll slip, it'll get below ten percent, but not by much where some somewhere in the nine percent range. This this is going to be a slow process of getting unemployment down UH. Certainly UH GDP growth, the level of GDP not getting back to pre UH pre virus levels until early two.

So it's it's gonna be it's gonna be a long slow slog on on improving this labor market substantially. I will say that the quote of the year possibly came from Vincent de Laard in a story a boy Bloomberg's Sarah ponzac He said, I would summarize as the bear market for humans, where companies that had the fewest humans relative to the market value to the best and you saw humans cut in droves. What does this say in terms of wage deflation? Well, you know, it depends on

depends on a sector you're looking at. There are some shortages in some areas, you are seeing some increasement, but over overall, I think in the service sector, the sectors where you've seen a sharp cutback and demand is likely to persist for some time until we get the vaccine, until that's widely available, and we're not assuming we'll be there until probably in the middle of next year. Uh.

With something that's widely available and effective. Um, it's going to be it's gonna be a negative for for for wage, wage and alation. Uh. Certainly households have obviously household income has gotten a huge boost. On the fiscal side, You've seen incomes rise substantially. UM that that points to the critical importance of getting something done here, uh and in the weeks ahead getting a resolution on on this, uh

the support package. If we don't get it, we're looking at the possibility of a double dip procession Q four Q one and uh, further negatives on wage inflation. Certainly, this is an incredibly important statement by Dr Hooper. Folks, let me explain this again on the standard nb er discussion of negative GDP two quarters in a real Q four Q one. And I know it's squishy and Dr Hooper is not like getting out a calculator to figure that out. But the idea of going back into recession, Peter,

is across a country of immense inequalities. How have our politicians not acted so far? Are we see action in Germany, action in the United Kingdom and we can't seem to get it done to avoid the Hooper recession? Yeah, well that's uh Hooper recession if if we get no further fiscal support, if the vaccine doesn't materialize until well into next year. I mean we're looking at some some clear negatives here. As I said, the data to now have

been a little bit more positive. But Slippage, John slippag John consumer confidence UH, and the possibility of further setbacks on on COVID nineteen as we go into the winter months. UM. These these these all UH say we're we're looking at the potential for a more negative picture than certainly built

into the market at this point. I will just say, Peter, one of the big confusing points for me is that as we talk about the potential for a double depercession and yet the work that we've seen from the Federal Reserve from easing of credit standards, we are seeing an actual tightening in lending standards by banks. And this comes

from Goldman Sacks. They put out a report showing the fastest pace of tightening in in loans to businesses over the past couple of months, going back to the last recession. Does this concern you? Is this the banks seeing something that the rest of the market isn't well, Lisa, It's interesting, Yes, those lending standards have been tightening impressively, as as you

would expect when economic situation de jurates significantly. At the same time, the default rate, which normally catches up to these kinds of tightening, has not really moved that much. I think. I think the aggressiveness of the fiscal response that we saw initially, the and the support through p PP, the and the feds UH main street lending facility waiting the wings. That hasn't been a factor yet, but we

do expect it will become more important. All of these are leading to a little bit of a disconnect between this tightening of standards and the eventual fallout in terms of what's gonna happen. Has credit crunch, ships, businesses. Peter Hooper, thank you so much with Deutsche Bay greatly appreciate it and look forward to your thoughts after Jacksonhole as ahead of their economic research right now and arguably the interview of the day on what doesn't matter at the conventions.

Libby Cantrill joins us now with PIMCO Head of Public Policy. Libby I spoke with Westernman of Arkansas yesterday. He says Hot Springs and Southern Arkansas, Western Arkansas are doing well. They're removed from all of his trauma. And then you go to Kenosha, Wisconsin. In the uproar of the last three days, including death last night, and in between, there's a huge part of the country desperate for stimulus. Can we get stimulus once it's conventions over. Yeah, well, good morning, Tom. Yeah.

I mean we've we have, PIMCO have and I specifically have been talking about the additional stimulus was a question of of win, not if. Now that win has definitely taken longer, certainly than I thought it was going to. Um. The the sort of the perennial stumbling blocks around the level of benefit, and specifically as it relates to unemployment insurance, Local and state funding a big issue for Democrats. They got very little in the Cares Act. Uh, you know,

hundred fifty billion dollars for states and cities. Democrats want more in this next round. And then you know, funding for usps UM. These are the obstacles really to getting a deal. I continue to think there is a framework for a deal. I think that the inflection point will likely be the end of September though, that is when Congress has to come together to pass a funding bill to avoid a government shutdown, So we may have to

wait until then. Um. And again we thought it was gonna happen sooner, but some of these partisan issues just gotta have gotten in the way. Let me Lisa bram Wants mentioned brilliantly American Airlines nineteen thousand. They're taking a forty thousand down with early retirement, best buy out with whatever the number is. Our politicians in your world moved

by actual firings. Yeah, I mean, look, I think that I think if you, if you talk to folks on the hill, there there is an acknowledgement that, certainly, um, the the economy needs another shot in the arm. I

think these headlines certainly underscore that. Um So again, I think that the there's a broader acknowledgement that the political risk in particular going into the election without having additional stimulus, sort of speaking to your point, just the headline risk of going into the election companies announcing more firings is just too great for politicians. So again, I think they will come together to pass something, just taking taking longer

than certainly what we expected. So we're not hearing much noise out of Washington right now other than the r n C and the d n C. And yet every week that goes on, economists say hurts the economy based on lack of extension of this program. When you talk to portfolio managers within PIMCO, how do you help them gauge the risk of a prolonged negotiation process. When can they expect some sort of deal to get done and

what are the consequences of the delay. Yeah, I mean the earliest at this point, given that you know, folks are on the hill are out for their their usual August recess, really is going to be the middle of September at the very earliest. But that's when they come back. So that would be predicated on a deal being struck before then, but probably, as I said, late September again, that is when Congress has to come together to pass a funding bill to avoid a government shutdown, And it

looks very likely that these two things are combined. From an economic perspective, we are seeing some states apply for that added benefit that the President authorized under his executive order. There's some issues with that, and of course that benefit is about half of what we saw under the Cares Actum and only lasts for sort of four to five weeks, so there is a risk obviously, And we're seeing some

of the preliminary data consumer confidence is lagging. You're seeing some other data metrics that the economy is once again slowing. So again I think there's a broad acknowledgement of the Hill that something needs to be done. Um, just a question of how they get there. Is it an under priced risk that it's going to take a while? Yeah, I mean I think at this point the market does seem to be priced in in uh surprising in some additional stimulus, and so certainly that is a tail risk.

If everything falls apart in October, we don't have a deal, folks will be back in their districts campaigning for the election, and then it does look very unlikely that you get something until after the election. So that certainly is you know, is a tail risk. It doesn't seem that markets are necessarily focused on that Libby in your world? Is there a middle ground? Is there a middle Democrat, a middle Republican and they have political power a political voice now

and after November? Yeah, I mean, Tom, it's it's a great question. Um. There there are certain constituencies on Capitol Hill. There's the problem Solvers Caucus that is a bipartisan caucus that is um sort of aimed at that center demographic that you that you talk about, Um, and we'll see. I mean, this will obviously be predicated on the election outcome, but something I think it's sort of important especially for

the markets. To keep in mind if there is a Democratic suite, So if Joe Biden is elected to president, Democrats control the Senate and win back control of the Senate, you have to remember that who are those Democrats that are making those majorities in both the House and the Senate. They're actually from either purple districts or even red districts

or red states. Um, so there will be kind of a more moderating force within the Democratic Party who are probably going to be more inclined as reaching across the aisle. So I don't think, you know, centrism is totally dead, but obviously, over the last decade or so, our politics have become so polarized Jerry Mandarin I think is exacerbated. Lack of earmarks have exacerbated this. So they're certainly the demographic, but it is it is sort of a smaller one, unfortunately,

Lett me cancel, thank you so much. With PIMCO, I think there's a lot of dat opportunities that are available to people who who are creative, who have a vision

for the future. I think you know, in ten years will look back and there'll be ten world class companies that were created by people who we probably think are thinking are crazy right about now a gentleman from Pittsburgh Cuban, What an interesting life at University of Pittsburgh and on he went to huge prosperity, including invigorating many would say enthusiasm, literally how owners should be within sports with his Dallas

Mavericks as well. Always an eventful interview, made more so by David Rubinstein appeared appear, uh, the gentleman from Carlisle Group, and of course we've been thrilled with his wonderful interviews. Well, how do you prepare for a Mark Cuban interviewed David Rubinstein book. I read that, Um, he's got lots of press, so he's read all the articles about him over the last two years or so. But he is a person

that's very smart. I mean, if you don't know him, you might think he's just a bombastic person who spouts out things at basketball games. But he's a very, very smart person. He built a company way ahead of the technology revolution, sold at a big price, and he managed to uh make certain that the profits didn't go away when the tech bubble burst occurred. And he's made a lot of money over the years. But he's actually very thoughtful, and I think the interview was much more impressive than

I thought it might have been. You have been good engaging politicians to be It is the discussion of Mark Cuban entering American politics, any inclination of that. Well, like a lot of people who make a lot of money and don't know what to do with themselves afterwards, because they got all the material things they want, they say,

why not run for president? Nited states This idea has occurred to a couple of people obviously, and Mark Cuban actually was a friend of of Donald Trump and Donald Trump and when he was running for president initially talked to Mark because he thought Mark was supporting and then ultimately Mark decided not to Mark looked at running for president this time and concluded after doing some polling that he wouldn't get very far and didn't want to do it.

His family also wasn't in favor of it. But he's still only sixty two years old and he could run again. So do you expect Mark Cuban? You know, I think there'll be a lot of people in four But I would say the idea of that a wealthy business person who has a lot of money to spend, could run for president United States and actually win. It's not as ridiculous as it once was. So I wouldn't rule anything out. But Mark is actually very creative and what he's done

with the Mavericks is pretty impressive. He bought it for about two eight million dollars is probably worth two and a half to three billion now. Um, and he's would say the biggest problem he has in his life. I said, Mark, you know, everything seems to work perfectly for you. What the problems do you have in like? He said, Well, I have a teenage daughter, and managing a teenage daughter is more problem than anything else I've ever had. That would be That would be true as well, Um, you

know the time for surveillance correction, folks. I did mention the Pittsburgh affiliation of Mr Cuban, but Lucas from Bloomington emails in and says, hey, stupid. He went to Indiana University at Lisa pick it up from there from he's from Pittsburgh. He grew up in Pittsburgh, but Indiana University had a business school which we could afford. He didn't have any money, and so he's from a Jewish family. His name was changed, like somewhere in Ellis Island. Uh

and Uh. He went to Indiana, made a fair amount of money as a bartender and so forth, then moved to Dallas because the weather was good. He said that women were beautiful and he wanted to just have a nice lifestyle and there were some jobs there. But he started a number of businesses and he's done quite well over over many years at time. Almost everything he's touch

has worked out well. Yeah, And when he was talking about the NBA, he was saying he would welcome a Jewish player, frankly, any player, uh, even from Mars if they could win. I am wondering, David, talking about all of that money that Mark Cuban has, what's he buying? Well, Interestingly, he's been a long term owner of Netflix shares and Amazon shares, and he would say a large point of his net worth is actually the money he's invested in those companies. He has been in the past a stock trader,

and he knows a lot about tech stocks. But he says, right now, there aren't that many tech stocks to buy, so just load up on the really good ones and go for a right David, this is really important. I want to rip up the script here. I just think

it's so so important, David. You mentioned something really important, and the guys are entrepreneurial, and maybe they're like Carlyle with private equity, but so much of the wealth construction of these people, including Mr Buffett's very successful Apple investment, is making conventional share investments. Do we underestimate that in

the media, that they just make sound, conventional, traditional share investments. Well, the tradition has been generally that if you make private investments, you can add value to them and ultimately the return will be greater, and the return has been good in the private equity world. However, if you bought Amazon, Netflix, Apple, uh those kind of companies five years ago, three years ago, two years ago, six months ago, you would have done

spectacularly well. If you take those companies out of the stock market indexes, the indexes aren't doing quite as well that those companies have just driven everything. And it's just my big mistake that I sold after the I p o my shares in UH in Amazon, well within that and that's okay, David, I was in triple loverage Dog Cash, so you know, let's how well I did, David, What are the opportunities right now with all this cash sitting around, it's almost two good the trillions of dollars of cash

on the sidelines. Well, it depends on what you are interested in. If you're in public shares. I do think the public shares are pretty high right now, so I would be a little leery um. And I do think that after the election, whoever wins, you'll probably see some softening of the market, because I think the federal government will probably not be able to put that much money back into the economy compared to what it's already done

in the private sector. In the private equity world, I do think there's some opportunities, but nothing is cheap today. It used to be you would buy a company in a private setting for eight or nine times cash flow. Today they're fourteen or fifteen times cash flow, and you just have to either accept it or you're not gonna be buying anything. David Rubinstein, thank you so much. Really looking forward to Erk Cuban, a peer to peer conversation

with Mr Libenstein. Thanks for listening to The Bloomberg's Vannlain's podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio