Surveillance: Inflation Target with Slok

This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business app. Tourston slockholding court at Deutsche Bank for years. He's a chief economist

Well, that's a very good question, and I think the answer to that is it's all about the dual mandate. That for a long long time they've been focusing on the inflation part of the dual mandate because it was very clear that inflation was and still is at levels that are too high for their comfort. I do think that the narrative, both for the FED and also for markets will now begin to change towards growth or towards employment. In other words, what are the reasons why we're still

Son, how do you explain jobless claims coming in lower than expected? How do you explain other metrics of wage growth continuing to remain robust.

Yeah, so, in that sense, there's still a very strong label market. Everagej ob earning last Friday went up, and this label market, obviously in jobless claims still looking relatively tight, would certainly also get the Fed to say, well, we still need to hike rate more and still tighter monetary policy is needed.

But at this point, if you see companies, whether it's Delta, whether it's PEPSI, whether it's a number of the others that are seeing profit margins expand with their input prices coming down more than what they can charge consumers.

You have people who are employed.

At what point does it become a virtuous cycle that offsets any pain of those rate hikes.

Well, and also at this point, as you also talk a lot about the housing market is beginning to recover, traffic or prospective buyers is going up. You look, existing home sales is going up, New home sales is going up. Home build their confidence, home bio confidence. Even the number of office receiveder sole property is also going up. That bidding walls are coming back. And remember housing makes up forty percent of the CPI. So the risk is if we start with core CPI, which was at four point eight,

I want to look at the larger of the miss standpoint that America is fully employed. This is in theegeis off the jobs report five six, eight days ago, and this is the employment as compared to population ratio of prime age people in America. It is a full recovery mode and particularly back on literally back on regression, back on trend. That's got to be the most optimistic chart for politicians in America.

Well, and that's why the debate for the FIT is probably, well, do we need to solten the label market? As you know, different FMC members are putting different weight on this. Do we need to solvet in the label market to get inflation to come down? I mean, let's not forget inflation. Today, Core CPI was at four point eight. We are nowhere near the two percent target where they wanted to be.

One less understood aspect of FED policy is not just what happens when you raise rates to the pace they have, but what happens when you hold them for a prolonged period of time, especially as companies have already refinanced and aren't really capturing a lot of the higher yields that are being charged out there by investors.

When does that bite? When does that scenario change?

Yeah?

No, The very important answer to that is that this is exactly the crystallization of the transmission making. This of monetary policy. Where is it showing up? And the answer to your question leads, that's showing up in a number of different places. You are beginning to see the linguity rates for auto loans going up, the linguagy rates for credit cards are going up. You beginning to see the

Lisa, this employment to population primate, this is the core of America. The success of a decade twenty ten, off of the terrible financial crisis, moving to seventy five percent employed, up to eighty percent employed. Granted, there's a lot of people not in that number that are unemployed. A pandemic that was worse than the financial crisis. We've rebounded back and we burst through where we were in the autumn

Well, and this becomes sort of the question what could change that scenario, which is why we're wondering about transmission mechanism. If you don't see that, you're saying, we do see a default cycle that is starting. However, at the same time, some of these companies were sort of destined to default to while back and are now just sort of being washed out.

What do you see this cycle looking like eventually? When do you start to see some of those lag effects taking effect.

Well, one way to do that is on my Bloomberg scream to type shok and try to give a shock to the fitfunds rate five percent is points higher. What is the profile for GDP over the next several years if you do raise the Fed funds rate by five percent is points in a very short period of time. And the answer is that it takes three, four or five quarters before you get the maximum impact. So in other ways, let's talk about this as what happened to

That's worked out well. You know, I got fourteen ways to go here in our two hour conversation, but I've got to drive towards the arch overlay here, which you say about it, Apollo, And I'm going to go to Paul Romer, the great growth economists, the great economists thinking

Well, at least on the AI front. It's certainly something that's small happening in financial markets than out there, and they're really con what.

About out in the real economy. I'm thinking about your Germany flat on its back right now.

No, well, the bottom line is still that the Europeans definitely, of course experiencing some hitwinds as a result of the AI boom that we're seeing in the US at the moment. Unfortunately, we're not quite seeing that in the productivity data as we speak, but you're right, over time, this will certainly

It's quickly here you were talking about how as inflation comes down, that's when you start to see profits come revenues come down. Is this sort of the unspoken reality that actually inflation was positive for companies increase their revenues and allowed the growth.

Oh.

Absolutely, this is spot on, because inflation is not only about output prices, it's also input prices. In other words, things that are sold when you have high inflation could have wider profit margins. But the cost of production we're also very elevated. And if all that comes down is not only helping in terms of lower cost of production, it's also going to squeeze margins.

I keep thinking Tom about what Torristen Slock just said, and we heard a similar kind of discussion from Tony Dwyer that when revenues come in, that is when it is a game changer.

And perhaps one of the.

Most unstated, understated and also misunderstood aspects of inflation was how much boosted companies revenues? How much boosted and all of a sudden, when you start to see inflation come in and revenues don't increase the same kind of levels, then how much do you see a resetting back to a normal type of assam Sure you impute.

The inflation in the system. The giant Phil Couray value investor pioneer in New York lived to be one hundred and four whatever. Nominal GDP is the great misguest right now, isn't it?

Absolutely? And what's really critical about this is that equities trade on nominal data. Bonds and rates traits on real data.

Stop the show, guys, frame that give that to every show this week, say it again. Nominal GDP matters.

Because what matters phenomenal earnings in this in P five hundred, which has grown six percent annually for the last forty years, is all about nominal variables and normal GDP, nominal revenue. Everything is mentioned in normal terms. So when facing comes down, you should also expect the bond market to look at

Turston, thank you so much, greatly, greatly appreciate this today with Apollo as well, the hallmark of the show has always been to keep score. We take careful care with those that get it wrong. We really pay attention to those that get it right. There is no surprise to anyone over the decades to know, with a longer timeframe, a longer perspective, the gentleman from Yale once again has nailed it. Edward Yard Danny joines this, President of your

I watch sentiment in the equity market very carefully, and there's something called the investors Intelligence old Bear ratio, And in mid October it got down to zero point six to zero, which is as depressed as it was in March of twenty two thousand and nine. And I was thinking, surely things aren't anywhere near as bad as they were back then. And I've also been in of the view that we're not going to have a economy wide recession. I would have the view that we've been in a

Do you think we can carry on beating up low expectations?

Well, the problem now is that there's too many bulls. You know, we've nothing to fear, but fearless investors, we don't really have enough. I mean, the technical sentiment picture isn't that that good because there just aren't enough pessimists out there. But the problem is, the fundamentals are really good.

You know.

I think everybody's swung around from worrying about an economy wide recession to sort of embracing a disinflationary soft landing. And you know, we'll see what happens with the PPI, but you know, we could have a trifecta of really great numbers. Expected inflation on Monday was lower than the next, and the CPI was great, and I think the PPI is going to be very good as well. So disinflation is here.

Well bank and ex validates some of the optimism I think.

So I think we are going to see a continuation, as you've pointed out, of an increase in loan loss reserves. The Fed actually puts out a weekly series on that for large banks and small banks. For the large banks is actually up sixteen percent on a year over year basis, So there could be some disappointment on earnings from that perspective,

Months ago, you were talking about forty five hundred. How high have you gone in terms of s and p FO.

Yeah, I've actually I'm going to raise you by one hundred. I've been talking about forty six hundred. But what's the difference. You know, it's been a bull market since October twelfth, and the problem with forty six hundred is roughly close to that. That's my year end target, and it looked delusional earlier this year, I have to admit, but it's worked out awfully well. We're only, what you know, one hundred and fifty points away from them, maybe less than that.

How profit margins fit into this. Because we were speaking earlier about the likelihood where we could see a shifting narrative there, especially if revenues come in the way that Tony Dwyer was talking about, do you see things differently?

Well, we have had a earnings recession, a very mild one. It looks like earnings are going to be down about eight percent on a year over year basis during the second quarter, and that should be the worst of it, and then we start to progressively see better comparisons than a positive comparison by the fourth quarter. Interestingly, this earnings recession hasn't been attributable to revenues. Revenues for us P five hundred are at an all time record high, so clearly

I look at your Denny at the past here, and it's so easy to go back and do some analog with ten years ago or forty years ago. The fact is, when you know, we first knew your Denny at CJ. Lawrence, you were with lu Rukaiser talking about the public and individual stocks. Now we are overwhelmed with index fund investment and ETF investment. How does that change the dynamics of the market, optimistically or negatively given these new instruments.

Well, it's very frustrating for individual investors and certainly for institutional investors that we're taught that diversification is an important aspect of managing a portfolio, and suddenly we have the megacap eight stocks that accounts for twenty seven percent of the S and P five hundred. So you know, if you don't have twenty seven percent of your portfolio those stocks, you've been underperforming. So it's a lot of pressure to you know, play that game, to you know, continue to

What's the theme for twelve ands forward? What's the next theme for corporate America to perform?

Well, my theme is I tend to focus on longer term themes. My theme is the Roaring twenty twenties, which again looked quite delusional over the past few years. But the decade isn't over and there's still time for it to run, and I think it. I think technological innovation is going to make a big difference.

Johnny, there's the pandemic of nineteen eighteen, nineteen nineteen, yea boom right into the roaring.

You coined the term bond vigilantes. Can you offer us your analysis on the bond market right now Treasury specifically.

Well, it's interesting how well the bond market's been doing in an environment where the FED has been raising short term raise quite aggressively, and in an environment where we have quantitative tightening where they're actually letting their securities mature. There's clearly been a tremendous demand for bonds. I think a lot of it is there's a tremendous funel liquidity

Is there an obvious relationship at the moment between how treasuries performed and what equities have been doing?

Yeah?

What is it?

Well? I think you know, last year they were both doing horribly. It was something we hadn't seen in quite some time. Now, I think both ascid classes have done quite well. I mean, you know, the bonds have at least earned you the coupon. They haven't really hurt you. I'm looking at the bonds to I think the bonds peaked at four point two percent on October twenty fourth. I believe last year a lot of good things happened in October of last year, and so I think the

So you think even if the FED sticks AT's say five point fifty and just holds it, that this equity market it's okay.

Well, you know, the fans have been kind of telling different stories. When an individual FED officials have been talking, they've been awfully hawkish. But when they get together and put together there's summary of economic projections. They've been very reasonable. They said, look, we want to get it up to a restrictive level. I think they're there. The banking crisis I think demonstrated that they're there. It's restrictive enough, and

That's our theme. This morning, when you weren't here, they were busting my jobs about victory labs.

Well, we won't call this a victory lap for you, but certainly so fast. Don't do that so fast, so good that it's going to see you, Thank you, thank you, sir. At any of any research.

My experience is people listen when Alan Ruskins speaks. He has the privilege of working with David folkerts Landau and putting together Holistic Global Research for Deutsche Bank. They're chief and national strategist. Joins us on what I'm calling from Steve England or a game changer Thursday. How much did the game change yesterday, Alan Ruskin? With disinflation codified in the United.

States, whether disinflation was codified, but things did certainly change substantially in the FX market. We've been entrenched in this incredibly narrow range really.

For most of this year.

Euro dollar in particular, it's seemingly capped at one ten nineteen. I think once we broke that level, it's opened the floodgates in a way, and the dollars on the defensive pretty much against all currency. So it's codified a change, as it were in the FX market, Tom.

I looked at a very fancy regression of the blended dxynx back twenty years and certainly off the Great Financial event of two thousand and eight. I can look for further eight percent dollar weakness. Do you see that kind of scale to go further with dollar weakness?

Tom I, do you know when you look at these big dollar cycles, you know, historically we used to have, you know, sort of six or seven years of updollar uptick and then nine you know, maybe even ten years of dollar famine.

As it were.

This last cycle got broken up a little bit because of COVID in particular, and we had a bit of a longer uptick. But the downticks, the down cycles are typically in the order of about twenty five percent down on the trade weighted index. So we've probably gone maybe a quarter of the way through a typical down cycle. So even if we have, you know, half a cycle, we could certainly get that eight percent that you suggest, and it could be substantially more than that.

When is fundamental growth matter?

Again, Alan, I mean, we're talking about the raid hiking cycle, we're talking about inflation, but it also is a question of fundamental economic strength that the US seems to be displaying, even as Europe faces a lot of headway and potentially more rate hikes into weakness.

Yeah, you know, the way I look at it, Lisa, is that there's a continuum where you think in terms of strong growth, a sort of no landing situation, then a soft landing story where you could even have a recession but it's a shallow recession, or you could have you know, really amounts to a hard landing where the FED pushes to the point where something really breaks at the moment. In that continuum, you've shifted towards more of that sort of soft landing arena with the FED pivoting

And to that point, allan I'm thinking about typical cycles from the dollar does worse. Usually that is a risk on scenario, risk on in emerging markets, risk on around the world, a sense of growth. How does that dovetail into the potential weakness and greater weakness in other non US areas at a time when the US is actually shockingly resilient and showing a much faster pace of disinflation.

Yeah, you know, I think we are certainly looking at the US being one of the slowest major economies in terms of GDP growth for twenty twenty four. The UK will probably utu US on a GDP Q four Q four basis for twenty twenty four, but the US is pretty much up there. So we're not seeing and do not expect that other economies will quite match the degree of slowing that we anticipate for the first half of twenty twenty four.

Obviously that doesn't materialize.

That gives the dollar a little bit more of a boost because you're not going to get the rate cuts that we're expecting for twenty twenty four all.

And where's a tradable pair here. I mean, it's one thing to say, you know, Euro higher, but where's the opportunity here, the big figure trade that you would suggest for Deutsche Bank clients.

Yeah, you know, I think if you want, you know, sort of a soup up euro trade, then you know.

I like the Norwegian chron particularly.

I think it's grossly undervalued by every metric that we look at, PPP, dB fear. I can you know, throw our acronyms global and they will tell you the same story that the Norwegian Krona is grossly undervalue. So you know, in a world where you know, sort of high betas are trading, okay, the Norwegian Krona has got a long way to ghost.

I mean, you got Norway. There is that an oil play where it's just simply a linked into a Deutsche Bank recovery in the price of oil given better times, given better global demand.

No, I think it's a it's more of a high beta euro trade.

Really.

It's got drawn down and pulled down a little bit by the Swedish Prona, which is you know, had its own set of problem that don't necessarily relate closely to Norway. But you know it's getting tagged along. But no, I know, I see this really as a europlay, but with a high beta currency that's extremely undervalued.

Ell and I featured at the top today the absolute shock of a peso comfortable twenty one twenty and imagine Mexican peso strengthening through seventeen. I didn't frame that. How how can that happen? How does Mexico improve from here to fifteen or a fourteen level?

Yeah, and I think people have been playing the Mexico trade now for a couple of years, and you just saw a little bit of a squeeze because you know a lot of people were long Mexico versus the yen and the yen side of things squeeze quite badly.

Look, I think the.

Mexican fundamentals have been remarkably resilient for you know, a couple of reasons. One, it's under bank as such, and there's very little leverage in the system, so that when rates go up, the Mexican economy does prove pretty resilient.

And then I think there's a structural story and a structural.

Play whereby people are relocating close to shoring, as it were, to the US and away from Asia and China in particular. So I think those elements are still there. The data still looks okay. When the trade accounts start to deteriorate, we know and we'll get the much strongest signal that the Mexican peso is more significantly overvalued. At the moment, it looks overvalued on a real exchange right basis, but we don't really see it in the trade data.

We're speaking with Alan Ruskin of Deutsche Bank. At a time when the dollar is the strongest going back more than a year, you could see the euro ascendant and the possibility, as Allen projects, out of one twenty euro. Good luck to all of those European vacations that everyone's trying to clock in right now.

I'm wondering out from.

Your perspective, how much of a boost this will give US businesses, international businesses that have suffered with a strong dollar in terms of their sales overseas. Does this in some ways give a headwind to US growth down the line, in a sort of on the margins level.

Yeah, I think Lisa, you hit the he used the right word. At the margins.

This is going to be helpful for US corporations, helpful for exports, helpful for the.

Equity market as well.

So you know, we've got some constructive elements there. Experts have held up quite well in the grand scheme of things in the US a relative to other countries, so you know this is going to.

Be a further boost.

I think there's some very helpful things happening in US manufacturing. The defense industries obviously doing extremely well.

You've had this relocation.

In terms of semiconductor plants back to the US. You know, you've got some very helpful elements there. So I think this is you know, this is all the more good news as far as the resilience that you were speaking about earlier.

Six days of dollars against the U right ureret dot on one eleven sixty seven and I'm risking at Deutsche Bank there on the FX market.

Erica Njerian joins us in a large cap banks and consumer finance expert here at UBS. Erica just a general question to begin the discussion, what will you look for in the beginning of the press releases tomorrow into Monday into Tuesday. What is the theme the tendency you will look for?

So there are really three things that I'm going.

To look for.

First, is capital, like it or not. A lot of investors are laser focused on capital and how banks are building capital, not just because the rules are getting tougher, but also because there continues to be uncertainty in the economy in terms of the outlook, no matter what the

Estate, and so those are really the.

Top three things I'm going to look for in Friday.

How do you wait your large cap world with the super regionals, the regionals and the svv P like the smaller banks that are out there, what's the level of importance of the next three or four days versus everything else in bank earning season.

Well, I'll say that it's probably an even more pivotal time for the regional banks, particularly the super regional banks that are within the scope of the bar speech with

How are they going to grow capital?

The good news is that the Bar speech is indicating that these super regional banks do have a lot of time before these tighter capital rules become final.

There is a question, of course, also around some of the largest banks. Goldman Sachs in particular has been guiding down its guidance pretty aggressively and with a break from some of its past practices in terms of not giving intra intra earnings guidance. This is likely to become the worst quarter since David Solomon became the CEO. This according to Mike Mayo over at Wells Fargo, what are you expecting and why the negative kind of results that we're expecting.

So, Lisa, not to defer your question, I actually don't cover Goldman Sachs, but given the vagaries of you know, trading volatility and investment banking volatility in the quarter, you know, a lot of the banks have been you know, giving mid quarter updates but also saying that a lot can change over the you know, over the next few.

Weeks going forward, What is going to be the main pressure that you're looking for. Is it going to be loan losses, loan loss reserves at the big banks. Is it going to be interest margins. Is it going to be how much the deposit beta is increasing as they try to compete for deposits.

That's a great question.

I think that because the bank failailures put deposit costs and deposit growth in the spotlight, it feels like that is already priced into the stocks in terms of further pain, and I think the CPI print gives bank stocks some relief as we can see the light at the end of the proverbial tunnel. In terms of FED tightening, you know, I think the one thing and the bar speech was pretty much down to fairway, so to speak, with regards to what the market is expecting for further regulatory tightening.

Erica, very quickly out of time. But what's the single best buy right now? We're going into earning season. We're gonna tape this, play it back on Thursday. What's the single best buy among the.

Big banks Bank of America.

I thought, Okay, that was short and brief. Thank you Walter having me for a sing sing.

Assumes you were up against the clock some Yeah, that's the right thing today.

Yes, thank you, Thank you, Erica.

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