Surveillance: Inflation Surge with Porcelli

inflation and what does the FETE do about it? Yeah, so I think here's here's what I think is really very interesting about about this inflation report. In particular, I think what we need to keep in mind is those waitings. I think those waitings gonna there's new waitings. I think they're going to haunt inflation for the next few months. Um. You know, you now have a bigger weight on goods.

And as we've been writing about for quite some time, the thing that's really doing most of the driving from an inflation perspective is really good prices and make a mistakes. Services are certainly um starting the process of of amping up here a little bit. But this is really a sort of a goods dominated UM inflation backdrop. And what's

interesting about that is this new waiting. The waiting is now about one and a half percentage points more weight toward goods UM, which again just keep in mind that's uh, this is sort of an interesting thing in the context of we are a service dominated economy, but goods now have a bigger weight. That's obviously a reflection of what happened last year. People were spending uh, you know, um a lot of this extra money that they had on goods,

not services. So I think what's gonna wind up happening is, you know, if if the transition from goods to services spending um uh you know is sort of slower to evolve UM this year, and then we think that probably will be the case. That means that you could actually continue to see some some additional upward pressure on in lation because of this this new bigger weight on on goods. I think that's a really sort of an interesting thing that that not a lot of people are talking about.

But here's the but here's the punch line time to all of this. While I think that that will be the case for the next you know, sort of you call it the next couple of months, few months where you'll see continued upward pressure from goods. I think what's gonna want up happening this year is that this transition is going to happen from people basically spending a lot

on goods and shifting to services. And so what will want up happening I think as the year progresses is that this new firm weight UM in goods will actually want of acting as an anchor around the neck of goods prices. So as people shift from goods to services spending, we think that that will actually want to putting some pretty notable downward pressure UM in the good space. I want to be clear, you know, that's the anatomy of

what we see happening over the balance of the year. UM. I think in the immediate term, I do think that you're going to see continued up pressure so so so Tom, I think, and again it's not to not answer your question directly, but I think that that's the thing that's really sort of doing most of the drive from from from an inflation perspective, the consumers are in a great spot from a wage perspective, you know, to sort of the continue to sort of drive UM to drive spending.

I mean, look, we all we live in a nominal world, whether that's you know, sort of a better or worse idea. Um. But and so I think that that, you know, sort of gives the consumers some some confidence to be able to spend. But but again, I think that you're going to see this transition away and I think goods prices could actually start the process of slowing pretty meaningfully. Again

give that, give that a handful of months. But I think that's probably where we're going to get me too, March, because we need to do March first, middle of March, March six, the fed mates what's on the table and what on earth happens with that dolt plot. Yeah, so I think that you know, you're looking at probably for four hikes this year. Um uh, you know the fedt is gonna go twenty five to start this process off.

I mean, look again, you know, I love that the pal keeps on saying, you know, they want to be humble and they want humility. Look at all, Frank this they should have had that last year, all of last year. I think what they actually need now this year is also a hefty dose of patients because I think if

the patients will be rewarded. If they do not get aggressive here early on in the cycle, inflation is going to start the process of slowing at a minimum base effects are going to eat into the year and year pace. But if I'm right about this transition from goods to services um spending and that taking quite a bit of the heat off of this this you know, sort of the singular component that now has a bigger weight that's

been doing a lot of the driving. I think that they can they if they have a bit of patients, they can avoid a fifty, They can avoid going every meeting over the balance of the year. Um. But you know it's that's repelled to decide where does the balance sheet come into play here, Tom, Because it's not just about the rate hYP mechanism. Yeah, no, I think that's true. I mean, look, and this is I don't know how much time we have. This is I'll try to I'll

try to keep this part of it tight. Also simply say, is QT is not the mirror image of q E. That's not the how it works with q E. You know the amount of duration that the FED is pulling out of the market right there buying you know X number of ten Eccember of seven, etcetera. We know that definitively.

With QT, you do not know the amount of duration that's being added back into the market because what happens when the Fed basically starts the process of unwanting to balance you, they create a funding gap between themselves and the Treasury, and so it's the Treasury that decides what duration is going to be added back into the market. So, in other words, if the if the treasure is going to meet the funding gap with you know, loading up on bills, well then there's no duration added back into

the market. And we think that's actually what they're gonna want to do, because bills is a relative too. I'm totally outstanding is actually pretty pretty small time. I got a bright to hit, so if I've got a few seconds, But let me just put a conclusion on this with you. Are you saying this gets worse before it gets bets up.

I don't think there is any question about that. But again I think you live with a live with it being a little bit worse because I think by the end of the year it will be quite a bit better. Of BC Capital markets, TM, we appreciate you, so we always do thank you. If you are in the stock market, you need to stop what you're doing now and listen

to one William Booth. Bill Booth is an epic and they have a method, they have a style, and you need it when it's a bull market, you need it when it's a bear market, and you really need it. Among the historic tumult of the moment, the tenure yield touching up two percent, we're not quite there yet, down negative to seven on the opening, Bill Booth. What a shareholder yield and why is the study of that so valuable right now? Good morning? Shareholder yield is all about cash.

Cash is king in the equity markets in our view, and shareholder yield is all about owning companies that are returning gobs of cash flow to shareholders in the form of dividends, sherry purchases, or debt reduction. And the market like this with the prospect of rising rates. I think there's been a lot of talk about shortening the dire ation of of portfolios, and you can think of shareholder yield is a short duration approach because you're getting more

of the intrinsic value of the company up front. What do you do with a short duration focus is the X axis. You hear me talk about what do you do with an X X is dynamic, shorter, medium, or longer with a huge cash flow tech generators like Microsoft,

Google and Amazon. So I think those those companies actually are owned in some of our shareholder yield strategies UM, and I think in those instances the dividend yields tend to be a bit more modest, but certainly there are very large and aggressive share repurchase programs, and so I think, uh, we look at the dividends and repurchases of roughly equivalent forms of returning cash. And of course there's another use of cash, which UM if you have right management teams.

And I heard your comment about Disney and I you're in SHAPEC if you have good management teams. Were happy to see reinvestment through things like M and A. And we know we saw Microsoft use some of its pocket change seventy billions to announce the acquisition of Activision UM and we're perfectly happy with with M and A UM if if it makes strategic and financial sense. So Bill, you know again, we did have some good numbers from

Disney last night. The time, and I've been parsing through, and I guess we're about two thirds of the way through the earning season here, and earnings that come in very strong and potentially allaying some of the valuation concerns in this market. What's been your takeaway from the earnings that you've seen so far this season. I agree with

your assessment. I think on balanced, they've been quite strong. Um. Certainly we've had a few hiccups, like Meta the other day, but I think, you know, some of these earnings disappointments largely seem to be I would say company specific issues right with Meta clearly has to do with you know, maybe it's competition, maybe it's the iOS changes privacy. UM. So when we've had disappoint meants, I don't think they have been um alarm bells that whoa, there's just something

systematically wrong here. I think the Ernie disappointments have largely been company specific one offs, and for most of the company's recording it's been quite quite good and above expectations. So I know some of the names you like, one jumped out at me, Sony. I would love to hear your Sony call here, because that's a company that a lot of people don't really know how to value is

it electronics companies and immediate company? This is brilliant. Bill Booth and Paul Sweeney between the two of you, has Sony been a train wreck for ten or is it twenty years? Yeah? Tom, you're exactly right, And I don't think anybody really knows what to do with this name. Bill, what do you think about Sony here? Well, we really really like it. And actually if you look at this stock price chart, it's it's tripled over the last five years. So the train wreck is maybe go ok good? The

track the tracks um. It's funny because because most people when they think of Sony that they think, like me when I grew up, Sony is all about the Walkman jority even know what a cassette tape is, let alone Walkman Um. But that that stodgy consumer electronics reputation has

sort of stayed with the company. But what Sony really is as a premier global media and content company six its profit is now coming from video games, music, and movies, and we know we're in a world where content as king, and so this company has a seven percent free cash flow yield, valued very much like a stodgy consumer electronics company,

even though it is a premier entertainment company UM. And we think that, you know, as the company continued to deliver good strong revenue and profit and pre cash flow growth UM, that this stock will continue to work up even after it's UM recent rise. And I will note that it did set off on the Microsoft Act Division news on fears of increased competition in the PlayStation business, going head to head with with Xbox and a potentially

more formidable Microsoft. But we're very comfortable that that Sony has UM the strategy and assets in place to to deal with that. Yeah, Tom, I'm looking at the c o MP function for Sony. This is a stock that's over the last five years has had a compoundent on a return of almost eighteen percent per year, so smidge better than SMP is completely removed from that. Yeah, it's this extraordinary. So I just wanted to amateur, I am, but that's why we wanted we get experts like Bill

on here and Bill, I mean this inflation. You know, when Tom goes to fill up the surveillance Bentley, he sees it at the pump. When I go to the supermarket, I see it there. Inflation. I'm just I'm I continue to be concerned about it because many people in this market, most people in this market had never really experienced long term inflation. How concerned are you about that after this morning? It's a little bit more than I was last night.

You know that the reading this morning we're we're troubling in the sense that we're seeing a broadening of inflation. You know, it was really a good and adorable, good story for for a good spell. But now you've got services inflation over four percent year in the year. Um, and it really is a tax on the consumer. I see the same thing at the gas at the gas station myself. So, um, it is a tax on the consumer.

And so we sort of have you know, maybe the said now the rate market saying maybe there's a fifty chance of a big increase in March, and you have decellering earnings growth probably through the rest of this year. That competition of a combination of rising rates and decellerting earnings growth generally is a good one for markets. Bill and did a chart this morning of American banking is

compared to your European banking. Is banking where you want to be given inflation, given the curve oddities we see and is European banking a value or the mother of all continued value traps? Well, for decades it's been the value mother of all value traps um. I think you know. The struggle with with banks in general is it's almost a Goldilocks scenario because in theory, rising rates are good

for banks net interest margins. We all know that, but at some point we've know the less twelve hiking cycles eleven have resulted in a recession. You don't want to own a bank going into recessions. It's almost like the markets saying with the financials Goldilocks. The fen is gonna do just enough to make the macro backdrop ideal for banks, but they're not gonna do so much that they cause an economic contraction. And that's something that history says doesn't

really happen all that often. Bilbo, thank you so much, greatly appreciate with the epic investments and shareholder yield. Right now, we're gonna digress. And when you go to Brown Harris Stevenson for those Stevens, for those of you worldwide and across this nation, all you need to know is fancy real estate in New York. We're gonna talk to Best Friedman,

their chief executive officer, about the real world. Best, You've got a listing on eight Street and not the fancy part of eightieth Street, which is one bedroom, one bath and a kitchen. I can't turn around in and it's popping five nine thousand. My question to you, and this goes with all the great work that you do nationwide with Brown Hairs Stevens, is do we have the income levels to afford the new real estate price you're touting? Yeah? I mean, hi, Tom, It's so nice to see you,

by the way. Um, Listen, none of us expected that would be the performed the way that it was in real estate in New York City. It came back with a vengeance and prices have gone up. Um. But remember we were in a buyer's market. We have now shifted to a seller's market. So people made a lot of money during the pandemic and things are starting to open. There's a sense of safety. We have a new administration, new mayor and governor working together, um, looking to mitigate

crime and get our city back and working. And so I think there's a lot of good things happening in New York City. It's turned around. But as you were, guys are talking about and frightening me a little bit with this inflation talk. Uh, the cp I going up is you know, not ideal. You know, we have less power in our money to spend um. But you know, the truths don't grow to the sky the best best This is really really important. Is the lack of rising

incomes one of the constraints unsurging real estate inflation? Or is that just something nobody worries about because there's so

much money slashing around them. Yeah, I mean I think there's definitely a lot of money slashing around, as you put it, um and prices have ticked up, but not incredibly in New York City, and so people have come back and they're here and they're investing, and they're changing, they're moving around, and so I don't think that's a huge The inflation piece is not the thing that's worrying people in New York City. It's really the focus is making sure that crime is under control, that we're focusing

on getting people back to work. Because the market, it did not take up so much in New York City, the prices. It's the other regions like Connecticut, Palm Beach. Those markets you saw incredible prices go up, and now the supply chain is really sure there's nothing to buy there. It's an inventory issue. Best. Just because we are so focused on that inflation data today, given how hot it was, we're going to have to see some sort of reaction

to that. On the monetary side, we are expecting that the Federal Reserve is going to raise rates a number of times this year. When that translates through to higher mortgage rates, what impact is that going to have on real estate, not just here in New York City but across the country. Kelly, Look, rates are still historically low, and I think it's good that they increase them and they go up maybe once or twice. It will be

good because it can't keep moving at this page. This is why part of the reason why the prices have gone up. It's a contributor. And so we can't you know, can't be Champagne and Cave are forever. Things have to slow down a little bit, and so we need supply and demand to intersect in a better way in other regions so that the market will stay fluid um. But inflation we can always you know, We've dealt with inflation

in the past. We've dealt with rates going up. What we can have is a paralyzed market from something like a pandemic or like we saw after nine eleven uh an act of terrorism. That's when markets freeze, and that's when people are scared. Inflation we can deal with. We can manage with inflation well. And obviously it's not just about on the monetary side. There's the fiscal side of the equation, and there's a great debate about how that

has contributed to the inflation we are seeing. But best on the fiscal side, a lot of what we thought might come to fruition under the Biden administration, differences potentially a change in the salt cap have not. What is the impact of that when you're thinking specifically of this Tristate area, I mean, we're that's still they're still discussing that. We'd like to see that increase from ten thousand I think they said eighty thousand dollars, which would be helpful.

The good news, Kayley, is that we have a new city council. We have a new speaker, Adrian Adams, who is much more moderate, and we're hoping that the legislation in Albany is going to be much more reasonable economically so that we don't drive people out of the city. So I think we want to create sort of tax policy, as I always say that seat in economics and that we work to create an environment that keep people here. We need rich people here. We don't want to drive

them out. We want them to be here. It's important for the city. Best Freeman, thank you so much. We've got Marcus moving with Brown Harris Stevens on what we're all talking about, which is the inflation and rent in ownership of real estate nationwide as well. When I go out for dinner this Friday, do we need to take photo ID to get in a restaurant on Saturday morning? Do we need photo I D to get a coffee to go into a cafe? I believe the answer is

it depends. Because there's no longer the mask or vaccine mandate. As of today, a business doesn't have to ask you to wear a mask or check your identification, but that's going to depend on business to business. They're free to make their own decisions. So John, I guess it depends on where you go. Maybe bring the passport in your McDonald's on Third Avenue is taking a very loose check. Would you like to test this a little bit later

this morning? I do that, you know every day when I go there for breakfast, you know, we check it out. I look forward to checking out of it, like, Okay, Christian Briers going, what are they talking about with us? Truly one of the world's experts on epidemiology and this virus. Christian Brier joins us, of course with John Hopkins in South Africa, and we're so honored he could attend to us on a weekly basis. It is an important moment

for me. Dr Byra And then I just noticed in the Washington Post the chart where I can report deaths have rolled over. They're not like cases, they're not like hospitalizations. But now that we've finally seen the moving average of deaths roll over, do you feel that will continue from on down to the nirvana of nine deaths? Well, we always knew that deaths were going to lag behind hospitalization

and hospitalizations behind cases. The cases are down, hospitalizations finally coming down, and so the decline in deaths is is what we'd expected. It's still high. And remember that we started at a very high baseline before a macron in the United States. So but yes, it is, it is trending in the right direction. We're paying attention to the new A macrons subvariants in pluting the point to but it again looks highly infectious and not as pathogenic as delta.

What should we know about that? Give us thirty seconds on these new sub variants. Well, these have emerged within a macron lineage and they share that same high infectious nous. But it does appear that they are not more lethal, not more pathogenic. It's taken over very quickly here in South Africa, so that the amicron B A point too is now the predominant variant that that is turning up here. But what we're seeing happily is while infections, uh you know,

are rising with that variant, deaths are still declining. Yesterday they were only twenty two people who died in this country. A week before that it was under a hundred, but nowhere near that low. So that's really good news. Okay, Dr Byros, We're talking about different variants in other parts of the world. Dr Anthony Fauci, when talking about the situation here in the US to the Financial Times yesterday said that the US is heading out of the quote

full blown pandemic phase of COVID nineteen. I guess full blown is a phrase is probably open to interpretation. Do you agree with that characterization? Well, I think part of what Dr Fauci is referring to is the fact that first of all, we now have the broadly neutralizing anybody's We have the anti virals, our treatment is getting better, and the amicron wave is declining, so we have many

more tools to manage COVID. Again, of course, we have an epidemic of severe disease in the unvaccinated and in the unboosted, and in the elderly who are either unvaccinated or unboosted. That hasn't changed. But the al kit has greatly expanded, and I think that's really what he's referring to, that we have so many more options. Well, and part of that tool kit, as you mentioned, is boosters. He went on in that interview to say that he doesn't think that every American is going to get to need

regular boosters. Where are we in that conversation, not just in terms of getting doses of existing vaccines, but whether or not we can create a vaccine that maybe addresses all future variants as well. Well. There's obviously a great deal of work underway on that front of people who have been working on a pan coronavirus vaccine. Both Fiser and Maderna are working on a macron A specific vaccines,

so that is absolutely happening. I think the challenge that we're still seeing is that there's a lot of breakthrough infections even in fully vaccinated people with a macron That's part of why it's spreading so effectively, as we all know. But the boosters really make a difference in terms of whether you get severe disease, whether you in the hospital. Is the language a breakthrough infection nothing more than endemic? Is that honestly the definition of endemic, not really Tom.

What we mean by a breakthrough is a confirmed infection PCR positive and somebody who's been vaccinated um so Am Crown has had the ability to do that. We do also see infections, breakthrough infections and people boosted, but of course much less severe and less common. Um. By endemic, what we really mean essentially is that there will be upticks, but the majority of the population will be protected either by natural immunity, by having recovered from covid or by

vaccination and boosting. Obviously you're better off if you have the vaccine, don't. We're struggling at the moment to identify whether set in policies and bank by science or bank by politics. The recent guidance around mass mandates, the removal of them, the adjustment of them. What's been your reaction to them, Well, you know, we're we are on the right side of the Amicron curve coming down, but we still, as I said, have a high number of deaths, high

number of hospitalizations. Many of our hospitals are stressed. Uh So, the idea that governors, particularly in the Blue states, are lifting these restrictions because they're so unpopular at a time where we're just getting out of this does feel epidemiologically not supported by the evidence. I think that's why you heard Rochelle Willinsky say, as far as the CDC is concerned, we're not ready to do this yet. So there is a disconnect there, and I think that disconnect is largely

political and not epidemiologically driven. Dot to thank you for being so cleared on that. Dot. Chris byre that the John's Health Kings, Bloomberg School of Public Health This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and I'm 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