Surveillance: Kaplan Sees Temporary Inflation Spikes

be well. There's a debate on their way about what kind of inflation dangers are out there from additional government spending. UH. And if inflation does break out, you heard John call you the elephant in the room, you gotta deal with it. So what is your estimation if we get the kind of additional stimulus there talking about from Washington, what kind of inflation danger does that present? There's no question that

if we're able to get people brought i'llly vaccinated. UH, if we're able to defeat the variants of the virus UH, and we have a reopening as we go through this year, that along with fiscal support, is going to mean that that we have strong GDP growth. We're gonna we're gonna make big improvements on unemployment. And it wouldn't be surprising to see the cyclical elements of inflation build. Uh. And and I think that you're gonna have some supply outages.

We're already seen evidence of it. UH, semiconductors, metals, would products. Uh. You may see a little bit of even in in oil markets. But but I don't think those are going to be persistent. I don't think those are going to be long term. But I think there's no question the cyclical forces we will build and over time. The question for me is how strong are the accelerating forces of technology and technology enabled disruption, which have been muting inflationary

pressures for some time. How do those two cyclical instructural forces play out over time? That's what I'm gonna be watching for the The The temporary jump been inflation or rise won't surprise me. The question for me will be how persistent is it? And I for me, I think the jury is out on that right now. Well, they're talking about a package that would be three times the size of what the CBO projects the output gap to be. Is that too much? So I'm gonna not surprised, won't

surprise you. I'm gonna deliberately stay away from that topic. Uh. What right now at the Dallas FED, before any new package is enacted, we're already our forecast for GDP growth this year is approximately five percent. Uh. It's gonna be again loaded towards the latter parts of the year. And it assumes that we're able to vaccinate the the population broadly and uh and defeat these variants and get more

mobility and engagement. I think what I'm hearing in my district is what we need first and foremost, which is being discussed as you know in these package debates. We need more money to help achieve these vaccinations. That's the key right now. Uh. And it's gonna take mobile units,

it's gonna take more personnel. But if you can get people broadly vaccinated and get more mobility engagement, that's what will open the small businesses and get a lot of these a lot of these people that are out of work back to work, and more money to reopen schools. In person, schools I'm talking to need to be retrofitted. And we've got a historically high level of women who have left the workforce working mothers uh. And we need

schools to be reopened. Uh. And and some investment also in childcare to get those women back into the workforce. That's critical. So those are some of the priorities I hear about. Obviously, extended unemployment benefits to bridge when we're until we're able to get people back to work. That's another priority I'm hearing. But those are some of the things I mentioned. I'll stay away from the debate in Washington. We've got three trillion authorized so far for COVID relief

and another two trillion is what they're talking about. The argument has been from Federal Reserve officials that that's sustainable because interest rates are so low and as long as we keep the economy growing faster than the debt will be okay. Are you confident that that can happen, that the economy will grow faster. Uh. We're gonna get a strong boost to GDP growth in which I just talked about, and above trend growth excuse me, and most likely above

trend in two. The issue over the horizon, UH is what are we doing to improve sustainable GDP growth? And what do I mean by that? Once we climb out of UH and recover from the whole we're in and recover from COVID. We're gonna get back to some real challenges we had pre COVID. Slowing workforce growth, aging of the population, and productivity growth has not been sufficient to off set that, and so what would help with that?

Find ways to improve labor force growth Again, I talked about women reentering the workforce, but also early childhood literacy UH, improving secondary education, skills training, closing the skills gap, more widespread WiFi in the United States. I would love to see more investments in education and some infrastructure items, particularly WiFi,

that will help create more sustainable growth. But that will be the challenge that we're gonna be talking about of the horizon, how to improve workforce growth and improve productivity and so will we grow faster than deck grows UH. We're gonna have to find ways to improve GDP growth or otherwise the answer to that. I don't know whether

the answer to that will be yes or no otherwise. UM. I know that you and all of your colleagues basically have said it's too early to talk about when you might taper QUE, but I'm wondering how you assess the danger of inflating a bubble in financial markets, which is what a lot of people on Wall Street are talking about now. Uh. And the hundred and twenty billion you're buying a month to keep markets functioning when markets are

functioning just fine. Uh. Is there a point at which you think the danger of the markets bubble is bigger than the danger of pulling back just a little bit? So the way I make that trade off. While we're in the teeth of this pandemic, uh, and until it's clear we've weathered the pandemic, I think it's appropriate to be aggressive with our tools. However, once it's clear that we've that we've weathered this pandemic, and we're not out

of the woods yet by a long shot. But once it's clear we've weathered the pandemic, and we put this pandemic and the effects of it in the rear view mirror, and we're making substantial progress toward our toward full employment and price stability, I think we'd be far healthier to be weaning off these extraordinary measures. Uh. So that's the issue. UH. And I think as soon as it's clear we've gotten past COVID, which I don't know when that will be. I think would be far healthier to be weaning off

these extraordinary measures. Well, Uh, speaking of questions about bubbles in the markets, your initial career was as an investment banker, and now we've got this spack I p O mania going on? What do you think of that? Does that tell you something about where we are in financial markets or or this economic cycle. So I won't comment on any individual situation because there's a lot of factors that

go to into any any one of them. But I would say broadly, when you're when you're keeping rates at zero and you've committed to keep rates at zero for an extended period, you're buying eighty billion of treasuries and forty billion of mortgage backed securities, we should expect that that's going to have a material impact on liquidity financial assets.

And UH, that's why I've said we'd be wise, as as soon as we're able to uh to wean off these extraordinary measures, because these measures certainly have an impact on financial assets, and we'd be wise at the FED to acknowledge it, and and uh and be very sensitive to it. And and I'm I'm very concerned UH and and watching UH, you know, excess risk taking and excessis

and balances, particularly in the non bank financial sector. The issue is, while we're fighting this pandemic, and until it's clear we're out of the woods, I think we've got to be aggressive. So UH. The challenge will be after we it's clear we've weathered it, we've got to we've got to move away from these extraordinary measures, in my opinion,

and I think will be far healthier for it. I know the FED doesn't regulate equity trading except for your control over the margin rate, but what do you think of the sort of meme UH enthusiasm that's been going around. Does that worry you in terms of potential effect on the economy. So I, again, I won't comment on any individual situation. UH. I don't at the moment see UH

systemic risk UH in these markets. But I do think you're seeing, and I'll speak broadly, not about the situation asked, but broadly, you're seeing the effects as you'd expect of of again UH eighty billion of treasuries and forty billion and Morgan back securities. I think it's necessary while we're fighting the pandemic, but again, as after we get beyond it, I think we need to wean off some of these extraordinary measures. And I'm watching non bank financial markets very

carefully and what I would call excess risk taking. What I mean by that positioning that when um, when vol volatility is relatively low and credit spreads are tight and liquidity is good, look benign. But in hindsight, when you get a vault spike and credit spreads wide and volatility tends to drive up drop, you find people realize they're over risk and they've got a d risk and they've got to do it quickly. We saw some of that

in March, by the way. Uh, And and I'm concerned that we we should watch that carefully because there's uh, there's always uh, that's always something we are we need to be aware of it. And I am watching that carefully. Before we let you go, I gotta ask you quickly. You're our oil guy, Um, how's the pandemic left the oil patch? And UM, I know that President Biden's energy plans are somewhat controversial in your area. Have you modeled the effect of moving away from fossil fuels and the

impact on your district? Yeah, we have and and most participant in the industry have also modeled it. And so you've got an industry that's far more consolidated UH and you've seen a number of failures, bankruptcies, consolidations, UH, de leveragings. And I think that you've also seen an industry that is going to spend a lot more money on sequestration, carbon capture and reducing their their greenhouse gas emissions footprint.

And also an industry that is committed now when they have excess cash flow, to returning more of it to shareholders and less of it to drilling. So because of that, we think that UH supply UM and production in the United States will be flat with this coming year. UH and even though prices are are moving up, UH, people may be surprised that supply does not move up like the way they would have expected to in the past.

So the challenge in the United States is to keep a healthy oil and gas business understanding that a smaller and smaller percentage of energy consumption is going to go to fossil fuels and much more aggressive energy consumption to win solar other alternatives. And the challenge is going to be to make that transition Robert Catlan, Dallas Fed President, oil patch leader, thank you very much for joining us this morning here on Bloomberg. Troy sky Bridge Morning, Troy's

about the spread, still is about the come on. It's it's really about just an overwhelming amount of monetary stimulus in the system, right and to your point, negative yields, real yields and sovereigns that keep getting more negative as inflation comes back and rates can't haven't caught up yet,

and there's just the dearth of income. I mean, the only markets in the world that have still meaningful cash flow or in structure credit because they got hammered so back in March and they haven't come back fully, and the fundamentals still look fairly attractive. Um, but from our perspective, and not to back up Lisa and Tod by the way,

thanks for calling me a steamed um. But you know, if you're gonna make a choice right now where you want to be in the capital structure, at least in the equity part of the capital structure, you still have meaningful upside that this waterfall of waterfall, waterfall of cash and fiscal STEAMUS can drive higher. Yes, you can get spreads to tighten more. But high yield hasn't been high yield for the last six months at least right it

wasn't even that highving yield coming into the prices. So you know, from our perspective, you have massive money supply, massive fiscal stimulus that's just driving all risk as that's highed Troy. But dying to ask you this question then the two model the last what three weeks, what have you learned as an observer of hedge funds about game stop and all that, Robin hood and all that and the long short structure of the hedge fund world. Is it forever changed? You know, forever is a strong term

tom um. You know much of the you know, obviously game stop in m C and stocks like that. I mean, they've behaved very similar to what happened in the late nineties, but just on steroids, like everything else is on steroids in this post pandemic period. And so what long SHORECTY managers are doing across the board is they're moving up in market cap in terms of the shorts that they have on. They're getting even more diversified. Typically their short positions are a quarter to a third dat of their

lungs just because of the asymmetry in your face. Also, when in doubt, if you're concerned about systematic risk or beta, there's nothing wrong with using STP futures or an et F to take that risk out. But most importantly avoid crowded shorts. That's kind of shorting one on one U. I understand the you know, profit motive, but you should never be in shorts with more than short interests outstanding. So that's some of the changes that are taking place right now. But try to build on what Tom was

talking about. There's sort of a larger question here. Can hedge funds get really outsized value? Can they really find alpha in a world dominated still so much by central bank liquidity, a world that has proven inauspicious I should say for hedge fund performance over the past decade, well, inauspicious is a strong term. I mean, the hedge fund industry has a holded very well last year, particularly particularly

protecting capital in March. It's always been challenging to make money on the short side um most investors expect to lose money through shorts over time, but one of the key to have in short positions is to stay in the game right to mitigate downside in months like March or Q four of two thousand eighteen, or during the Eurozone crisis, so you can protect the downside and then

go on off ends. Um that being said, and we talked about this last time I was on, the industry is certainly more net long than they've been in quite some time, because again of that cocktail of you know, fairly good virus news, powerful money supply never ending, the fiscal stimulus that many would argue is too large the

stage of the game. Um So yeah, alpha on the short side has always been hard, but fortunately there's been both the past year and so far this year there's been more alpha on the longside and obviously negative alph on the short side. Final question for LSA drum roll, if we got this is this is four LASA. This is dedicated that do we have an asset shortage? Do

we need to wish you more Detroit. You know that's a great question, John, because you know, when people look at deficits, what they always look at is the liability side of the balance sheet, and they don't look at the assets side of the balance sheet. So you know, as the FED reflates right, and the FED also um prints more money um in the government issues more debt. What's happened particularly past year is the value of assets has gone up far more than the value of debt.

So you could argue that one way to cure that is to print more debt. However, you know the best argument is to have targeted fiscal stimulus that goes after those that are in the most pain and doesn't continue to create mini bubble lefter mini bubble after mini bubble that will ultimately lead to, you know, quite a hangover when the feed is forced to tie you. Now, we don't expect that to anytime soon. It's toltly not this year, but at some point, you know, the think of a hangover,

there's a hangover. After late nineties we had a housing bubble, you know, you know, oh five till six um, there was a mini oil bubble. In a way, these things always end in tears, and so for the time being, you want to monetize that. But you have to have an eye on money, supply growth and fed policy. Troy right to catch up, Seth. I want to see you guys. Look always applies. Thank you. Set The Bloomberg Intelligence Michael

mcclog has done the best work on Bitcoin. He's looked at the dynamics of it, he's looked at the modern market features of it. He's clearly been way out front and the vector moving higher from the lower left to the upper right. As a skeptic Dennis Gartman would say. Michael mcgloane joins us this morning with Bloomberg Intelligence. Michael, I want to go back to first principles. In a Bloomberg article today on coal and western China. There are

things called miners from Butch Cassidy. Who are those guys there? It's a global decenturized network following any place they can find cheap energy. From a strategy standpoint, the bottom line is there's nine coins that can be mined today. That's the max come. They'll drop to four fifty. So I analyze it as the miners don't matter and manners to them. But from a strategist predicting price, this is a set supply schedule. It's declining in terms of image, so only

thing that matters is demand. The key thing is it's only day. Come to page one of every economics textbook, including the ones Janet Yelling studied, is about scarcity. It is a manufacturer the critics would say contrived scarcity. That always means nefarious elements come in to force the scarcity away. Who are those nefarious elements that could take the scarcity built into the price increase. Well, there's eight thousand want

to be cryptocurrency bitcoins out there. There's eight thousand all coins. So they've tried. There's been many forks, everyone has worked, but they have gotten nowhere near the robustness and adoption that bitcoin has. So it's been through many deaths and yet it's keeps surviving. So that's the key thing about it. It's been killed many times, it keeps coming back. It's gained that global robust nous. It's the the go to

reserve now digital asset. I will say, Tom, I just have this image of Butch Cassidy behind a computer, plugging in algorithms and used remember and it's it's it's really quite an image, I will say, Mike. There is also a question about just how much institutional adoption there is. This is raised of course by Tesla yesterday coming out and saying that they will soon accept a bitcoin as a form of payment. Can you give us a sense of truly how widespread this idea is in major corporations.

Whether you actually expect to hear some announcements in the near future from other major companies about doing the same. Well, initially it was a wave, now a tsunami, and that's just getting started. Remember we're talking about a US corporations based in the reserve currency of the Dollar's think of the rest of the world that doesn't have that reserve currency, they have maybe much greater incentive to alligate some of their treasuries to bitcoined. So to me, this is just

part of what's happening. It's being adopted on a global scale, and it's part of the reason I think, remember when you at the thirty thousand that health support, I think this reason forty is going to hold support. Now it's

just going to continue. Something has to go wrong, which I knocked myself around every day for I don't know what it is right now, but it's on that it's in that unique phase where sometimes it technicals don't matter as much as what's the next support should it hold and just focus on your next resistance, which we all kind of know is around fifty number. The more institutional buying we get, do you think it makes it more complex more difficult for the government to step in and

do something. Oh yes, they're going to continue regulate. Remember we just had a theory and futures launched yesterday. We have bitcoin futures. So bigcoin's under the purview of a government. When you felt your tax, that's not government, that's the establishment of a market. John's talking about government regulation of a non financial, non coin. When does that happen? What might happen to something like it has happened to gold. But the key thing about bitcoin is no one's else,

no one's project, no one's liability. Like ripple x RP was someone's project and liability, and the government's cracked on in them. Here's the key thing about that. The government, the New York d a crackdown and tether. Tether's the number one stable coin that was an April two nineteen. Market cap then was about three billions, So they've been under that purview since two thousand nineteen. Now the market caps around twenty nine billion. So do you think they've

done anything a legal sense? It's pure organic, organic demand. What I see is the world wants a digital digital currencies and digital dollar, and it's getting it. And the government's getting regulations getting in there. My final question, how close do you think we are to a very well known American company that is not run by Ela Musk doing exactly what Ela must announced yesterday. It's inevitable. I don't see what's gonna stop it. Wow, Mike McLean. Great

to catch up, sir, Thank you. John Gets from Bloomberg Intelligence. This is an important interview. Julie Norman is at the University of College in London. She is a political science professor, but is truly one of the world's experts on political

activism and social movement. A different take on what we will witness in Washington today, Julie Norman, if you look at the Republicans, the Grand Old Party, the path from Lincoln to where they are right now, there seemed to be partitions, and one of them is militia and some of the violence we saw January six as well, tell us about the social movement that defines a more assertive,

a more aggressive Republican Party. Well time, I think there are different movements going on right now in the Republican Party and that's pretty clear and across the left as well. I mean, part of what we're seeing in the Republican Party is people who have very legitimate grievances who saw Trump at somewhat of a channel for that and are just kind of getting into more of this populous way

of thinking. But I think that's a longside, much more long standing groups like some of the far right extremist groups that we saw at the Capitol, those groups have been around for a long time. They will continue to be around in the future. Um. They really took advantage of that historical moment and have been pretty savvy about recruiting some other individuals into their into their ranks these days.

What can be the institutional response to the reality of guns, weapons, rifles, whatever in a legislative branch, whether republic Republican, or Democrat, What is the expected or best outcome for the institution? Well, Tom, I think our institutions and this you know this is true for Democrats and Republicans, that most individuals, most lawmakers, and even most American citizens have pretty strong respect to

our institutions. They want to see them function well. They don't want to see them the coming new places of brawls and violences, even maybe as they were in our in the past in our history, and so I think it's just makes sense that certain safeguards are put in place to make sure that happens. When that said, I don't think anyone in Washington wants to see the more

militarized state that it's in right now continue forever. Those precautions were put in place, obviously for a reason following January six, but they will be you know, it will go back to some kind of normal in time. But try with more security measures than we had in the past, did you. In addition to the highly apartisan discussions around impeachment around the stimulus package, there has been an international effort to regain ties with some of the allies of

the United States. One interesting note is that President Biden has not yet had a conversation with j and Ping, even though he has had a conversation with Vladimir Putin of Russia. What do you make of that, Well, I think it's a couple of different things, Lisa. For first and foremost that with Biden, we can expect him to really continue some of the policies of Trump administration in

terms of being taught on China. Biden is looking to really change that relationship that much, even though his approach might be a little bit different. I think with that phone call, Biden is also trying to show that the U. S School stand up to Russia as well, in a way that was different from the Trump administration. But there were just certain UH situations of urgency there that required

that call and that engagement. The you start treating for one that would have expired the past week if they hadn't had that call and that kind of engagement, as well as trying to put some pressure on Russia around Novoldi and the demonstrations around his detention. Judy always wantedful to catch up with your Thanks for him with us, Jenny Norman, that University College of London professor, a really important day down in Washington, d C. Thanks for listening

to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.