Surveillance: Inflation Pressures with Pyle

Michael Pile will join us. Now, yes he is chief economic advisor to the Vice President, but far more this is Mike Pile who took all the heritage of Dartmouth economics, think the trade of Douglas Irwin and the rest of even the modern Blanche Flower macro economic babble, and and brought it into a sterling record in Dartmouth economics, including winning the Rockefeller Award, hugely coveted onto Black Rock, and now again with the Vice President. Mike Pile thrilled on

this day to have you with us. I'm gonna go or my Michael McKee is I'm gonna go with Captain Rampod of the Washington Post is which is has got to be talk of price controls for this rampant inflation. Are you talking about price controls with the Vice President? Are you talking with about price controls with the White House? So thanks for having me, Tom. I would say the President and Vice President have a game plan that we are executing around the short term, uh and the long

term to expand the productive potential of the economy. In the short term, that means things like unstartling our supply chains. We've been taking actions there around ports, around getting more commercial driver's licenses out the door to get truckers on the road. Over the medium to long term, obviously, we're very focused on things like my conductors and getting investments

there to build our productive capacity. That's what we're focused on here, building that productive capacity out over the short, medium and long run. That can be the plans under control. But if there is a lack of control due to month after month of high inflation, again a word that's out there, rampant inflation, I believe from the Financial Times Mike Pyle, what this comes down to is do price controls work? In your stunning academic career at Dartmouth, did

you study that price controls can work? So again, I would say, you know, our job here is to use the tools that we have. We think that those tools go to expanding the productive potential, to supply capacity the economy in the short term, in the medium term. Uh. You know, if you look down Constitution Avenue here the Federal Reserve, they have principal responsibility for maintaining full employment

for stable prices. We are also looking to give them the space and the independence they need to take that principle responsibility. Our job here is to use the tools we have. We think we're doing that around supply chains, around calling for and acting on the investments to to give this economy room to run, to give the supply capacity economy room to run. That's what we're focused on. Mike, what do you say to people to say that you

guys run things too hot? Talk about the Federal Reserve and the lack of response we had from the Fed. But the argument that you run things too hot, that the package you passed when you took over the White House was too big for this economy. Yes, it was supply constraint, but you fuel demand. And here we are at seven point. Do you have an argument for that still that stands up? So I'd say two things. I mean, one, let's take a step back. UH, this is a historic

recovery that is ongoing. The fastest GDP growth in forty years, and unemployment rate UH now down to four percent, the fastest it's dropped on record. UH. Six point six million jobs created last year. That is a historic recovery. When we look obviously, we're very focused, the President vice president very focused on price pressures on the way they pinch working families. But we would observe that you know, this

is a global phenomenon. This is traceable to a global shock, the pandemic, and we've seen record inflation in the UK and Canada, the highest inflation in Europe in twenty some years. UH, this is a global phenomenon. But we want to build on the successes that we've had around their recovery. But also we're focused in a very laser like way with the tools that we have to bring price pressures under control to some degree. My that is true to a

certain extent. Some people would arcum against it. President that God herself has said this. She said this yesterday evening the U. S economy is overheated. Our economy is far from being that. She thinks, it's a very different economy in Europe compared to say, the United States, and you rattle through those numbers, and we do that as well on this program. There's some great numbers out there. The automate problem you've got as an administration at the moment,

as you obviously, the sentiment numbers don't echo it. People don't feel good and in the polls the administration is rolling over, including for the Vice President. It's been a difficult time for her as well. Mike's time on your side here going into the midterms. Do you think it is? Is the calendar on your side when you look at the inflation and the hope that it decelerates its year end. So I'm the economics guy, not the politics guys. I'll

just go straight to the economics. You know. I think you heard from the President yesterday in his statement after the CPI release. That's something we've been been saying for a while. When you look at the vast majority of forecasters out there, whether it's the Fed or or the private sector, they do see inflation decelerating meaningfully over the course of two At the same time, we like, they

see the labor market remaining strong. So our expectation is as we go through two, We're gonna see ongoing strength in the labor market. We're going to see inflation decelerate. I think you saw the glimmers of that uh in the CPI print and the jobs print last week, where we saw wages go up by point seven month on month, we saw inflation up point six. Obviously that's a firm print, but it was indicative of real wage growth. We think that as we moved through the year, that's going to improve.

His wages stay strong, but inflation comes down my pile. Thank you. Mike is going to catch up, buddy, Chief Economic Advisor to Vice President Karmena Harris. Let's get to the perfect ghost Jim's alter Apollo Global Management. John. What's so great here out of his dooke economics is the immense credit of actually running money. You know, it's a path from Smith Berney John that was a small startup firm a few years ago on the City Group and then onto Apollo. The co president and credit c IO

joins us right now. He JM. Let's talk about the business and then let's get our teeth into markets to the business. The inflow is fantastic for the quarter. Looking at credit strategies accounting for six of that during the period. What's driving that him, Well, we're fortunately we have an amazing platform and it was a banner year in every aspect of our business. First of all, investrial performance. We performed across the firm, from credit to hybrid to pe.

We deployed a tremendous amount of capital um and certainly from all of those metrics, investors do well. And we provide solutions for a variety of businesses, so the businesses is performing on all cylinders. Twenty one was a banner year, as I used that termament in all the economic performance. And you know, certainly we've continued to expand our role in the infrastructure of the economy. Credit is the lifelood of the of the economy. Um, we can talk about

a variety of the extension. Last time I was now we talked about a variety of platforms. Were still expanding that area to one of our three big five year strategic goals. But um, no, no doubt, twenty one a little bit in the rear view mirror. But but it was a record year in every aspect for us. You know what's terminating in the conversation this morning, it's the is a credit you've had from all the banks, five six,

seven hikes maybe fifty basis points in March. Jim, as you follow that conversation, what does it change for you for the company, for the business, for what you do today today? Well, you know, for us, we play an expanding role in in the credit markets, and whether whether it's the platforms like an auto fleet finance business like wheels Doalin, or an inventory finance of Elian what you

did with all of those. We are in touch with the end user of the end client and power and the marketplaces robust, the consumers and relatively strong shape across the board. No doubt we're seeing wage and and other inflation in the marketplace, but the credit markets are not rolling over right now. We're still in historically very low rates. The faults are expected to be quite low the next six to twelve months. Certainly as you get into twenty three and twenty four that may be a different story.

But we're relatively constructed on the underlying economy, which is what you really are investing in when you invest in credit. Jim, you're such a student of Wall Street. I've got to go to the leverage question. Usually when things blow up for Wall Street, American Wall Street and frankly Global Wall Street. It's this evil thing, leverage. What's the state of your

Wall Street right now? Are they exposed with leverage to any interst rate dynamics that we could see, you know, from in my three plus decades, I'm not seeing on the Wall Street participants of size areas where there's a complete lack of discipline um and if there is aggressive lending, they distribute and syndicate in the manner. So I don't

see any areas. Certainly, if you look at the leverage law market, the high yield market UM, with equity valuations so strong, there are a number of spins to talk about, you know, loan to value on enterprise values that are probably at the extreme level of high um and but certainly in most of the things in and our business what we do here to follow for our investors and for our institutions, we're a senior lender top of the

capital structure. We actually two or three times. But I'm not seeing the big pothole out there, i e. Housing or leverage finance that you saw on O eight oh nine. With within this then is the wall of money that's out there. There was a terrific infrastructure announcement of a jillion dollars made a few days ago. I can't remember the details, Jim. It becomes a blur. But how do you adapt to the unlimited alternative investment wall of money that is out there? Well, I think you're you're, you're

a great question is you evolved? The reality is the world is short duration and what I mean by that is long dated yield on tension assets. Uh. And there's a lot of there's a lot of secular drivers, so that the growing wealth a on Asia, the Middle East, Latin America, the pensions are actually in good shape. The rally in the last or three years have put many

many pensions around the globe in better shape. And as they get to a fund or closer that they want to lock in that and they transfer their equity risk to more income if you would. So there's no doubt if you look at how the role of private credit and yield is now a permanent part of investor strategies. Uh. Your point is well taken that whether it's in Japan when race or basically zero, and Japan Post Bank has north of two trillion of assets, they need these type

of yield strategies. So what Apollo does well in terms of responding to that with our type of returns Uh, there is an insatiable appetite that exists out there, and all we're doing is we are really putting the capital from our investors at the intersection of borrowers who are need solutions. So it's a it's a trend, and it's great. We're very fortunate coming into a business where every day the backdrop and the technicals and the tsunami actually get

better quarter the quarter. Jim gretta catch up, sir, great quarter. To appreciate your time on this market as well. What a fun time for a lot of people. Jim's outs of Apollo Global Management. With us, now we get lucky. Mark o'banna, the head of US rate strategy at Bank America Global Research, Mark Ethan Harris for the economy team, came out with the FED rate cool said seven hikes two weeks ago. There's non consensus is consensus now and

that's changed quickly. Mark, you oversee the Bannan sheet side of the call as well. Put it all together for us. What's the team looking for now? So kudos to Ethan he did have a great call on seven hikes for this year. The market style pricing now it seems like that's rapidly becoming consensus. There are still questions about whether

or not the Fed goes fifty in March. We on the Riach strategy team have been recommending the client position for fifty m We hit our target on that trade yesterday and certainly in the market's mind, it seems very likely that the Fed's gonna go fifty in March, and who knows, maybe even fifty in May as well. UM On the balance sheet, UM, we've also been pretty aggressive on the timing balance sheet reduction and key teeth. We believe that the bounty reduction will start in May and

it will go pretty aggressively. The federalll likely have one hundred billion caps redemption camps on treasuries and mortgages sixty billion treasuries forty billion mortgages, and they'll phase into that over a three month period. But while they're phasing into those caps, they're gonna allow their bill holdings, of which

they have about three billion, to roll off immediately. So what this will mean is that the Fed can shrink their balance sheet by over a hundred billion dollars straight out of the gate, with the bills coming off and those redemption caps gradually phasing in. And according to our numbers, we think that the FED will see their bounch sheet shrink by a trillion dollars in two. Again, that's a trillion dollar in and another trillion in three. So the

balance sheet reduction is likely to occur quite rapidly. So the feed will be technique not only through greate heights and the front end of the curve, but they'll also be tightening by adding duration risks back into the market at the back end of the curve. With the balance sheet reduction. Mark stuff, stop stop, let me jump in. Seven hikes this year, A trillion dollars of balance sheet reduction this year. Not here to say it's wrong, it's

a cool I want to talk about the cold. What on earth does the yield curve look like with all of that going on, flat, maybe inverted by the end of this year. Um uh. We we think that. Look, the back end of the curve only has a limited capacity to rise in our few We actually just revised our tenure call at the end of the year from two percent to two and a quarter my minor adjustment.

But what we're thinking is that, look, the back end of the curve is going to have a hard time rising in the face of tightening finance with conditions and presumably concerns about slowing economic growth. That's going to keep the back end anchor. Meanwhile, the Fed's gonna be raising right to the front end pretty aggressively. So we think you're gonna be looking at a pancake flat curve twos the thirties by the end of the year, with risks

that it becomes inverted. And we don't think that the FED is gonna feel terribly bad about that because they have an inflation problem. They need to tighten monetary policy pretty quickly, and they need to tighten beyond neutral in order to slow demand and get control of the inflation issue. So, Mark, if you have an inverted curve forecast by the end of this year, are you calling for recession then? So

we are a forecasters only for a flat curve. We're not at the inversion yet, um and we're not calling for a recession. But what we are calling for is a gradual slowdown in the economy over the remainder of this year and into next year. UM, an inverted curve doesn't necessarily mean that you're going to be in a recession right away. Inverted curves do have a reasonable history of preceding recessions, but with long and variable labs, and

we're not in the recession camp at this point. But what we are saying is that the FED has to take policy into a place where it becomes tight in order to deal with the inflation issue. They've got a slow aggregate demand in order to get on handle on inflation, and that means that the curve has to be flat

or possibly inverted. Mark. I don't want to front run you or Dr Harris this morning on what Bank of America is going to suggest here, but within the talk of an emergency meeting and the fundamental idea that that threatens central bank credibility. If they have an emergency meeting to change your world the balance sheet dynamic, does that threaten FED credibility? It's an original effort, an original action.

Does it? Actually you've FED credibility? So great question. UM, there's a lot of chatter in the market right now about an inter meeting move, especially following St. Louis FED President Pollard's comments yesterday. We think that an inter meeting hike is quite unlikely. The FED doesn't typically like to surprise the market when they hike. UM. They will follow the market in the hiking path, but they typically don't

like the surprise. And we think that it would it would be very unexpected to see the FED deliver an intermeding hype, especially since they're just not there. You had married Daily on the wires yesterday from the San Francisco FED saying that she thinks that a couple of hikes this year are appropriate. She's not even sold on fifty, never mind an inter meeting hike. And and and Tom, I would encourage you and everyone who's listening to pay

attention at three o'clock today. I know that sounds very specific, but it's really important because at three o'clock today, the New York FED is scheduled to release it's final purchase calendar. The final month of its paper is scheduled to be released at three o'clock today. And if the FED releases that calendar at three, interesting pretty strong forward guidance that they're not going to be doing an intermeding hype. UM. So again we would fade the notion of an intermeding hype,

especially if that calendar publishes as a schedule mark. Is there a chance they don't publish that, and just and ki right now, there is a chance of that, But we don't believe that they're gonna wait until three o'clock to surprise the market with that. We do believe that if they make the decision to end paper early Cold Turkey now, they're probably gonna tell us soon, like within the next couple of hours. UM, we'd be surprised if

they wait until three o'clock to make that announcement. And again, honestly, Jonathan, I just don't think that the FED is ready yet to signal an intermeding hyke. And that means that they're probably going to publish the calendar at three o'clock and for Foo to want to play for this intermeting hype, and there's a lot of them in the market. Just look at the February FED Funds futures contract. It's showing

rising odds of engineering. If you want to play for an engineering hype, we think you're better position to play for a seventy five basis point hype in March as opposed to an intermeding hype. In February, dear me, Mark comes struggling to keep up. So let's go through it together. The idea of seven this year, the possibility of maybe fifty in March. You and Ethan seemed to be still having a discussion about that. We'll see what the outcome is.

Bannet sheet reduction one trillion this year, one trillion next year. Talk to me about destination. Can you put a number on that? Because all the calls we're seeing some people going to five, some people joining you as seven Goldman one of them, they're not moving the terminal rate. They ultimately think that we end where they thought we were going to win three months ago. Mark, where do you think this ends at what number? So the b a house called Ethan's call is at the terminal rate between

two point seven, five and three percent. That's where the thinks the real funds rate will end at the end of next year. So terminal is going to be about neutrals discussing before because the fedest of Titan, Mark, I

want to go to the history of this. In this incredible moment you just described on this Friday morning in two thousand twenty two, the late Alan Meltzer of Carnegie Mellon wrote an important essay four years before he died, this in two thousand thirteen, where he was scathing, as you would expect from the conservative over quantitative Quicksand the Fed's got a deal with a quantitative Quicksand right now, are you suggesting we could see action as early as

this morning to delay or dismiss the New York FED action this afternoon? It's certainly being talked about in the market. Um. And the chatter around this was very very high from our clients on the trading floor at be a Bey yesterday. Um, there's a buzz about that in the market. Really fall away um St Louis Fed President Bullard's comments yesterday. But to us, look, this three o'clock announcement is a very

strong signal. It's very strong forward guidance. If it comes out as expected, um, then they're not going to go intermeding. But if it doesn't, then the odds of that intermeding potential hike are going to go up meaningful. We think the intermeeding hike is a fade um. And again, if you want a position for that for a more aggressive FED, we think you're better off paid march up one c l I s and maybe driving the Fed to go seventy five in their first time. Marcabanna, just unreal, and

I wish I could take this through the morning. Just fantastic, Marcabanna, that of Bank America. We're thrilled to bring you in studio for the first time since Nixon was president, well not that far back. Tina Fordham joins, us head of Global Political Strategy at Evans. Thrilled that you could because thank you so much for coming into the studio. Such a pleasure to be back on. These are delicate times times and that Russia has conveyed a message. There is

no plans, there's no this. There are talks to the north where we're comfortable with the map of Belarus, of the northern northeast of Kiev. I should say, in the southern parts of the Russian Federation. You have the courage to go the other way and look south to the naval reality of the Black Sea into this weekend. What do we need to know about Russia and Ukraine. Ukraine

and Russia and the Black Sea. Thanks Tom, It's a very important conversation, and I've been talking to investors here in New York and also in London where I'm based. And uh, you know, the memo is um is becoming more more clear on what might happen next. New military exercises have started. Uh, they're meant to last for ten days. Russia has been very careful to control the narrative and always position and moves as within its power as a

sovereign nation. The troops are stationed, of course on the Russian side of the Ukrainian border and and in in Belarus. But to block Ukraine's Black Sea access of would be regarded as an act of war. And we had strong comments from President Biden warning US citizens to to leave Ukraine. Um, the tensions are going to ratchet up over the next you know, the remaining eight days of these so called

military exercises. There's so many ways to go here, but in the limited time we have, and Gina Martin Adams wants to get in as well. I would think of James Travitas, with his NATO experience, his Annapolis experience as well. Do we have a capability of showing the flag in the Black Sea in support of Ukraine? That's one question. Another question is whether it be a good idea and and you know, in his NATO capacity. Um, of course

James wouldn't make these comments. But you're starting to hear more people articulating Putin's view, which is that NATO's eastward expansion is aggressive, that this is provocative, and what this is all about. Really, what Putin's doing is testing the post war um settlement uh that says that he, you know, she, he should be able to operate in his neighborhood. So Russia believes in sovereignty, except when it comes to to Ukraine. Tina. The natural um tendency of the market is to extrapolate

any behavior and look for next steps. So my question for you is really what would be next presuming we do ultimately get an invasion of Ukraine, what will Russia do follow to follow that up? Is that the end? Is Ukraine really the grand prize here or is there something bigger that we should be worried about. Well, I wouldn't be so so quick to assume that we are going to to see an invasion of Ukraine, right. What what we can say is all the preparations are in

place for a regional war UM in Ukraine. That's not the same thing as saying it's inevitable. So I do take issues somewhat with those suggesting that that this is going to happen. And that's because I think that Putin has already managed to achieve quite a bit. Um. You know, we just talked about how he's he's got more mind share for the Russian position that it should be able to do what it wants and its neighborhood without interference and these kinds of things, and the idea that NATO

should should be clearer about its position. Um so d escalation on Russia's terms is not impossible, right, as you know, I want to talk about what we talked to. The wonderful Angelis stand of course, her book Putin's World is absolutely definitive, and she moved on as you've moved on to a larger global analysis. I'm going to go to Yalta. This was a few years ago again on the bottom

side of Ukraine. It's time completely identified with Joseph Stalin, F Dr In Winston Churchill and Professor stant makes very clear that we're leading to some new structure of a tripolar world of the United States, of Putin and Russia, and of ascendant China. As well explained the delicacies of the new Russia China relationship. Sure well, huge respect for for end listen um of course, and uh, you know, I share that analysis. We've not been in a you know,

the bipolar world for a long time. I'm not sure that I'm ready to think about a tripolar world. Russia is a spoiler, right It's it has you know, nuclear weapons capability, it has a U N. Security Council seat, so it's a powerful, um diminishing state. But really it is a spoiler. It's a disruptor China and the US. The whole decidities trapped that lots of people talk about is another question. But what has changed since the statement at the Olympics is a more overt kind of cooperation

between Russia and China. That's important, for example, for the future of the of the monetary system um creating parallel institutions. I mean, it's not right to focus merely on the military manifestation of this power relationship. China speaking up saying that that Russia should be allowed to do what it wants. Of course relates to Taiwan as well. We were scheduled for a three hour conversation, but I'm told we can't

continue the conversation. Thank you so much for coming and please come again as well, and we look forward on surveillance of course, to seeing you in our London studio, Tina Ford and with Avan Hurston. I really can't say enough about the perspective she's given us over the last number of days. 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 a m. For insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple Podcasts, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg