Surveillance: Inflation with Sen. Rounds (Podcast)

am incredibly guilty of this. We look at well, the joke of me going below fifty ninth Street, or the idea that most of our audiences in three zip codes and a couple in London as well, and we forget about the open plains. Mike Rounds knows where the Missouri River is. He knows it. Getting from Pierre, not Pierre, but Pierre, South Dakota over to the Target store up by twenty nine north the Sioux Falls is actually something difficult to do. Evermore so five dollars a gallon gasoline.

The senator from South Dakota, their former governor, joins us this morning, I want you to give me a visceral picture, real estate guy, of the emotion and Pier and the emotion at that target store Northsoux Falls. What's going on out there away from the fancy people like Global Wall Street.

I know you like dollars and cents. The average South Dakota family right now is paying over six d and four dollars more per month in living expenses and what they were in January of that's seven thousand dollars plus per year more. And wages aren't going up that fast. When you start talking about that in places like South Dakota, the pain is real. And it's the same thing across the entire country. And the worst part about this whole

thing is is this is policy induced. When you start driving up the price of fuels, diesel, natural gas and so forth by policy determination. Uh, and you start limiting the amounts of some applies that are being produced, and you recognize that that you're doing it, and you do it anyway, then it's a policy induced movement. We can do a lot to change that right now in the United States, and it's got to come back down to

an administration recognizing that. Uh. You know, look, I know they're fighting climate change, but the bottom line is you've got to have a strong economy to do a good job on that. And they are hurting this economy with their policies, and people in South Dakota field that and they're not happy about it. Sent it around. Gerald Ford of the Republican Grand Rapids Michigan Persuasion years ago said he was gonna whip inflation. Now, what is the Republican

prescription day one to stop this inflation? There are three parts of the policy. One is demand you can do that through action of the Federal Reserve. But it's because we put a huge amount of cash into the economy earlier. Uh and that was a president that was a Biden decision and he did it without the assistance of Republicans

in January of last year. At number two, you have to read us the cost of energy, and that means you produce more energy all of the above, whether it be nuclear, whether it be more pumping, it means more leases being released. And then allowing them to get that that that crude oil out of the ground with additional licenses and then allow them to be able to actually move that to the marketplace with pipelines. That would be an immediate thing. And finally, you have to address the

workforce issues right now. And I know that this isn't a popular thing to talk about, but we have to have legal immigration reform. We need visas, we need H two B visas, we need H two A visas right now, and we've got legislation in place right now that we're recommending that would do that. All of those would help to reduce inflation in this country and the effects would be immediate. Well, just a senator, just to push back a little bit. You're talking about the issues with certain

policy prescriptions that led to the inflation. But a lot of this, a lot of economists say, is driven by some of the supply disruption is whether it's in China or particularly the war in Ukraine. How much do you see as inflation staying high as a results certain national security decisions being made that you've supported. Yeah, First of all, I think the actual inflationary trends with regard to the supply chains and so forth, a lot of that has

to do with the cost of transportation of those items. Now, can you have supply disruptions, We had it. We had it during the previous administration, but you did not see that driving up inflation. You saw inflation begin almost immediately upon the recognition that we were going to have increases in the cost of energy within this country, and they

were going to be increased by policy determination. Once again, if you take back and you look at the actual costs of energy and the impact of that has on all types of pricing for services and for products, it's a no brainer that you can begin to reduce inflation if you address the cost of energy. It's in all

those products aside from just the energy issue. Though, I'm wondering, Senator, would you agree with potentially relaxing certain tariffs in China or perhaps changing certain stances in order to reduce inflation domestically, even if on a national security level it was viewed to be prudent to keep certain things in place. I think that there there is always the possibility of looking

at modifying policy with regard to needed items. But remember there's a reason why we put those in place in the first place, and that was to try to develop domestic production. But if you can't do it domestically and you've tried it, then to look at other alternatives with other countries. It's not that we want to produce everything in the United States. We'd love to have good trading partners, but we also have to recognize it. Simply going back to China does not get into the long term scheme.

And as long as they're going to try to continue to steal the i P in this country, we've got to continue to to recognize the need for enforcement of trade deals and the limitation of trade with China whenever possible until they come around and recognize that they can't be stealing the i P, the copyrights and so forth. So yeah, look, I I'd be very stingy about going

back on what we've already done with China. I try to develop some of those products, those product lines with our other allies and other people that literally want to do business with us under the rule of law. Senator, thanks for your time today. We appreciate it, Senator. My grants there on the story at d C and Worldwide. Love Hano joins US now Global Chief Investment Officer of State Street Global Advices. Laurie, you've got that big cash position. You can talk to us about how big that is.

What do you want you for to deploy it? Well, first of all, there's a lot of uncertainty out there, So I would say the biggest theme around our portfolios right now is less about the directional trade and much

more about the relative value. So we've been trading around different markets, deploying capital into the US, which we thought was still a bit of a safe haven relative to other regions, but also looking at places like commodities, looking like at places like gold and as you say, holding a bit of a five percent cash position right now, Laura, you are the perfect one to talk about right now.

And folks, this is the esteem Shairman of Bloomberg Peter T. Grower telling me in times of stress you see transactions and combinations calls is flat on their back. They have just announced within all the troubles of calls over decades, board thoroughly testing standalone strategic plan. Are we going to see one big roll up, Laurie of American Financing corporations out of these risks and challenges, Well, every situation is.

It is socratic. And one of the things that striking about the recent announcements on the consumer side is that we've known for a while that consumers were likely to move from more goods oriented purchases to more service oriented purchases. And while we certainly have had some of the news out on on some of those retail uh franchises. The other side of it is you've got airlines and other service providers that are actually saying very good demanded actually

having the chrising power. So there's it's not just a one size so it's all there's gonna be a out of idiosyncratic behavior and companies that can think about what their exposures are and how to hedge those and where they do have pricing flexibility or power, those are the ones that are going to survive. I can't emphasize Lisa enough.

They need here to see one size is wrong. Target four fifty thousand employees Calls thirty five thousand, and yet people like to compare the two are completely different into in a ten year total return, Target gets it. Calls has been a disaster, right, And we can talk more about the two distinct stories, but they're responding to the

same macroeconomic backdrop. And Lorie, when you take a look at this multifascinated backdrop that is not just one narrative, what gives you conviction that, frankly, the market is right that the FED is going to blink well before it raises rates to restrictive territory, which seems to be the

zeitgeist right now in markets. Well, the big contectrum is we've talked about, and I've heard you talking about this morning as well, is that on the one hand, we still have inflation with we could argue whether we've hit peak inflation or not, but the numbers are still quite eye popping. We all know that eventually that wears itself out because the comps here over you get harder and harder. But that's happening at the same time that growth in

the from a macro standpoint is slowing. And so this delicate balancing act is what the Fed's got to navigate, what all central bankers have to navigate, and everybody is afraid that they're going to get it wrong, and the chances are that they will get it wrong. We actually are a little bit more dubbish in terms of what we think the Fed's going to do, and if they move in the summer and then actually do take a bit of a pause, then there's a chance that we

get out of this without a recession. Laurie, thank you for your perspective. As always. Lori Hano, the of State Street Global Advices, this is an example of what you're seeing on the street he maintains outperform on target, but lowers the price target big time from a three oh five down to two. Those are the microadjustments being made. Patrick Palfrey is cohead of Quantitative Research and senior equity strategistic Credit Squeeze and is looking at the macro adjustments.

How are you using the micro changes of your cell side research team, Patrick, this morning, Well, when we talk with our analysts and we go through the transcripts and we look at where earnings estimates are moving, everything on the fundamental front seems very much intact. Estimates continue to rise their certain sectors communications in particularly what you're seeing pressure, but generally speaking, estimates are holding up quite well, including revenues.

Margins a little bit less weaker, but but still enough to propride the earning sport in a meaningful way. Were this is important, folks, because Credit Squeeze hit the ball out. So we hit the ball out of the park eighteen months ago with a wonderful Barbell strategy of bullishness. Patrick, if you've got a constructive view like that, are we over focusing on margins and not looking at a pretty good or good revenue lift based on nominal g d P.

We'll talk it. I think you're absolutely right. Companies live in a nominal world. I know, as as economist, individuals like to talk about real activity and they're like the piece out inflation. But companies, for the most part don't really matter. They are oftentimes in most cases able to pass that on and we're seeing that come through with revenues UH this year expecting to be plus tempers that

that's an incredibly strong number. So with revenues that strong, there's an ability to give up very incremental margin to see the range pictures still be up eighth to nine percent, and that is spectacular for this point in the cycle. What are you counting on in terms of rates to get you to that level in equities based in the fact that not only do you have, yes, you've got denominal growth, but you also have a revaluation based on higher inflation and frankly based on a FED willing to

raise rates much beyond what people had imagined a year ago. Well, it's it's it's a great question. And I think really what people are trying to understand there's a lot of pieces moving around here in our focus is really here on valuation that's really where the biggest distortions were. At the beginning of the year, we started with the twenty one point five multiple. We're down to a sixteen point five.

That's roughly in line with long term averages. But more importantly, expensive companies were extremely expensive, and that's where all the pain has been. You see that in secular growth themes, you see that in technology and communications. When you look outside of those groups, valuations look a lot more reasonable if the pain looks a lot less meaningful in those groups.

This has been a valuation rerating because of higher interest rates, and that's a meaningful part of the discussion, which sounds all very logical, and it's easy to then come on and say, look, if I like those stocks before they've been on sale, let's buy them. But it doesn't count for the behavior of investors who see their statements and say, holy cow, we've got to get rid of this. We've got to actually start selling. We haven't seen those kinds

of mass sales. How much of an over suits the downside could we see before we get to what you expect to be a rally. Well, I think we're pretty much getting close to that bottom now, Like like we piloted earlier in the show. Right now is really where the SMP is down historically, and and bear bear markets, we see it down a little bit more. But that tends to be recessionary. Right now, we have an incredibly strong economic outlook. Certainly inflation is a concern and I

agree with that. But right now, nominally GPS expect to be nine percent this year with real gene being three percent. That doesn't feel reflection, That doesn't feel recessionary to me. This is really important folks that are hearing here, this nominal versus real argument. Patrick. Let's say we've got a nominal glide path. I'm going to call it a harmonic You go from nine percent as you stayed, to four and a half percent. Maybe we get down to two

and a quarter percent at some point japan like. But within that time frame, corporations adjust and they adjust use of cash. What are you, as optimists feel use of cash will be starting now into this summer, and then there's a budget outlook the corporation's frame for two thousand three. Well, you know, companies are always very rational. What's how they deploy their capital? Right now, we've seen shifts towards the dividends, we've seen increasingly shifts towards five backs. We've also seen

a shift towards capex. I think all three of those areas are going to continue to see growth. We're seeing areas like dividends and like in capex get rewarded a lot more than five backs. So companies shifting that way are going to likely see better returns than perhaps going directly towards five backs. But there's ample capital on many of these companies, particularly large cap companies, given how strong for capitalism, were expected to continue to use that well.

A router way to ask Tom's question is they could start to lay off people in order to save costs in order to increase their margins, especially as you get the likes of Amazon and Walmart talking about how basically they have too many people paid too much. Based on the shift in appetite by consumers, I think as long as the demand is their companies are staffing to meet the level of demand. They're not staffing to meet stock market gyration. So yes, the markets down, and I think

investors are assuming that's going to impact company's decisions. But a company doesn't say I'm not going to need your order because my stock is up. They say, no, you want an order, I'm going to supply you with that order. Depending on how much demand declines from here, that's ultimately to depend on how much tapping they need. Right now, the GDP backdrop still remains quite wherebust. Labor market remains incredibly tight. Does that weaken incrementally, perhaps, But I don't

see that as being a huge catalyst in the story here. Actually, just to jump in because I think this is really important. I know that companies don't face what they need to supply the company with face on what's handing in the equity market. But I would say some of the C suite right now they are worse calling their own company than some people are on this show calling this market. And that's been the problem. These companies have set them sunds up for the demand of last year, and it's

not there anymore. We saw that with Target, we saw that with Amount was sort with Amazon. Patrick, We've got some stuff to work through here, don't you agree? I do think we agree, And I think there's areas of market that are particularly under pressure. Discrection areas is an area that's probably going to be weaker. I think technology is area that's going to be weaker as well. I think investors need to be selective and when where they

look at the opportunities for companies. I mean, we're we're investing. We're encouraging investors to look at cyclical oriented companies like energy, materials, industrials, things that benefit more from this backdrop and are less exposed to some of the issues that are happening perhaps with technology and and and with some of the issues with the consumer at the moment. Great to catch on Patrick as always to get your your perspective and send

out best to Jonathan as well. Patrick Putrey the credit sways this should be a three hour discussion. His ability in our international relations linked to our economy is formidable with his work at Goldman Sex International for years. Robert Harman's US now a tite of an advisor and a course of service to the nation in the State Department. Ambassador Hormats, I want to cut to the chase right now. I am hearing in every interview we will see a defense build out by Germany. We will see a defense

build out by the United States of America. The President waltzes off to the Pacific rim. What do we need to rebuild in the Pacific, to show the flag in an appropriate manner. Well, two things. One, I'm glad he's doing this now because I think there was a feeling in the Pacific, in some countries at least, that we were so preoccupied with Ukraine and Europe that we had more or less forgotten about the Pacific. This trip will demonstrate that we have not forgotten, that we realize that

it's important. Second, he's got to get this set of alliances organized. And there's been a lot of talk about coopera Aracian coordination, but there really hasn't been much progress on on trade, UM, the cooperation between the United States, Japan and Australia, New Zealand UM are all all these are important, and he has got to demonstrate that this

is a sustainable alliance. Pulling out of t p P was one of the worst possible things we could have done, because it showed not only a trade set of actions that was a pulling, but it showed that we really were not committed to a sustainable embassador. I want to get through this quickly because Lisa's got some really important questions away from this. This is your wheelhouse all Republicans and Democrats are against t p P. My guess is

there against Indo Pacific. Let's go granular to the reported victory of Marcos Jr. In the Philippines and what we do at Subic Bay and at Clark how and we shift our modern behavior back to what you and I knew in our ute. This is a critically important point. They're the way to look at Asia is there two island chains. One is the one that's very close to China. The Chinese really have increased their domination over that with their small islands and their new air force spaces that

they put in. We have to demonstrate that we have credibility in that so called second island chain, which is the Philippines, which is the Marianas, Guam and Um Australian New Zealand. We have to show that we are strong, a strong presence there and working with the Philippines, which

is critically important. It was in World War Two, it is now and that's going to be I think extremely important to demonstrate that we can work with young Marcos and and develop our main structure which was as you know,

virtually eliminated. But how optimistic are you that the political noise will be able to dovetail the national security issues of shifting around some trade partnerships at a time when inflation is very much at the forefront and people are more concerned about how quickly prices are rising as a result in part at least for some of the supply chain disruptions and realignments. A very good point. I mean,

the presidents in a difficult spot. On one hand, it is clear that a lot of the tariffs that we've imposed on China do contribute. They're not the main contributing factor, but they do contribute to higher prices in the United States. And yet if the president were to appear to be weak on that, it would look like he was weak on on China. The priority here, it seems to me,

is to deal with the inflationary issues. We can demonstrate that we're still resolute on China by strength in our alliances in the region, which gives the president more flexibility to lower some of the tariffs on China, which really have not had any impact on China anyway, but certainly have had an impact on prices in certain sectors in the United States. So if he's if he's tough enough and firm enough in building our alliances. It gives them a little more wable room to take action to reduce

UH tariffs on certain Chinese items. And he needs to develop these trade relationships that we threw away when we got out of t p P. He's got to resurrect those and make sure that we don't just talk about them, that we have a firm and and sustain program of trade cooperation with these countries in the Indo Pacific. Well, just real quick here, we just have a little bit of time left. What grade would you give this administration in terms of reaffirming some of these alliances. M I

give them very high marks. I think the fact that the president, now in the middle of what's going on in Europe, is making a major trip to Asia is going to be very important. There's gonna be a G twenty meeting coming up. Whether he goes is not clear, but I think that anything he can do to demonstrate with these friends and allies in the region um that

we're back and credible is important. The one thing he also has to do is make sure that he can get bipartisan support for sustaining this because a lot of these countries say, well volume is going out there doing this, making this good trip. But if the house flips and if you get another administration a couple of years from now, that could pull back American the alliances in the region. So we have to show a not only that we're doing this and we're and we're firm in doing it,

but be this is a sustainable proposition. You've got to figure out how to deal with the Chinese shoes that it really matters, really have no real impact on China. There has to be other stuff, which is particularly intellectual property, trade secret Inbassador, I don't mean we are out of time. We will continue this just discussion. Robert Harmas are particularly strong in the Pacific Rim with Tiaman advisers. This is

the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And 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