Surveillance: Omicron Risks

and ce IO of r B Advisors. Richard, when you're looking ahead to two now that there's a question about the fiscal agenda here in the States and a question as to how much of a growth impact we could see from the omicron variant, do you think differently this morning than you did a week ago? Well, Kaylee, I think that the markets right now were caught between a

rock and a hard place. Right in the short term, we've got this slew of bad news, whether it's builback better that you just mentioned, or whether it's COVID, or whether it's the FED from last week deciding they're gonna be tighter. You know, in the short term, you don't have a lot of good news. However, that short term news could cause the better longer term outlook as we go through three. So I think the short term here could be a little rocky. But I think to try

and trade that maybe a full scheme. So what do you do? You just sit on your hands, Richard, Wait what see what happens into the new year. Is that the right strategy here? I think, to some extent that's absolutely right. I mean, it's always cute to say we should trade and trade out, trade and trade out, but very few people can actually do that successfully. So so

saying one thing and doing is is another. So I think, look, it's pretty clear that inflation is probably going to be higher than people think in two I think that is the most important thing that portfolio should be structured for right now. Now that's not gonna look that way in the next two weeks perhaps, But remember, if we do shut down, let's say COVID is a lot worse than anybody things, and we do shut down, the supply disruption

problems that we've already had just get worse. They don't get better, and so the whole notion of the of inflation and of us being a price taker just gets worse. Richard. I'm gonna dig a little bit into that inflation call. When you're thinking about inflation into two, are you thinking we see some more deeply embedded wage based inflation start

to emerge? I think many much of the inflation excuses are the inflation sort of narrative around it being transitory has suggested that it's it's all due to the supply chain constraints. But how much of this has demand and how much of it becomes deeply embedded as we look into three? Right, So, so, Gina, one thing you said,

I think it's very important that the word transitory. So I think it's important to understand the supply disruptions have already lasted an awful lot longer than the seventy seventy four oil embargo right now was a supply disruption. It was a political supply disruption, and but it was a supply disruption and that changed the way people thought about inflation for basically the next ten years. And it wasn't the beginning of inflation, but it changed the way people

thought about it. So our supply disruption is are already much bigger, much broader, and longer than what we saw. But to get to your question explicitly, yes, we're having a perfect storm in the labor market right now. There's no one issue that's causing the labor market to be type. But you can think of you know, whether it's baby boomers retiring, whether it's COVID restrictions, whether it's immigration restrictions, whether it's the rise of unions. I mean, all these

you could argue are good or bad. Not my day job, but you're getting a perfect storm that is tightening the labor market. And I think that's a substantial change that's not going to go away. Well, you talk about all these supply side issues, supply side issues or not something that monetary policy is equipped to address. What the FED can do is tamped down on demand. So and the fence policy operates with a lag when we think about monetary polic See so, how does the inflation conversation actually

get solved? In your view? So that's kind of my point is, and I'm not sure it does get solved, so to speak. That's why I think one should have been on higher inflation. I'm not talking the ninety seventies type inflation, but think of it as an over under bed.

I think right now you should get the over on inflation as we looked at three, because you're right, you know, all monetary policy can do is to sign me demand, and that's politically unacceptable, especially as we head towards the mid terms in two would be a lot for the Fed, really tu intervening, Richard, Is that actually the case because my impression, certainly, and listening to the narrative coming out of DC at the moment, the Democrats in particular, and

the President is focused very much on this idea that he needs to tamp down inflation. It was interesting to see the pivot that we got from j Pal posts he was his reappointments the Democrats and I agree, we've never really seen this before, the politics stick that that they once inflation brought down. So what we owe in a different difference kind of picture here relative to previous cycles where we've seen inflation coming through. So I'll use

my analogy again, rock in a hard place. I think the Biden administration is caught in a rock in a hard place on inflation. Why because they reappointed j Pal. Right, we made the argument many months ago that if he reappointed j Pal, he owned inflation. If he didn't, then it was the previous administration that would own inflation. Because j. Powe was appointed by the previous administration. So by not reappointing Powell, he would say we have a clean slate

where we have to fight inflation. But now he owns it, and and so again I think the rock in the hard place is the right way to think about it. Richard talked to us a little bit about your investment strategy. If we're going to have a more deeply embedded inflation, if we're going to have faster inflation, but maybe not seventies inflation, what do you do with your asset allocation,

and specifically within the equity market, it's your mix. Yeah, So I think, um Gina the you know, obviously you want to have pro inflation assets in in the portfolio. And I think you know, most investors, whether the institutions, individuals makes a difference. Most investors are are very underweight

pro inflation assets. But at the same time, getting to some of the other questions we were just talking about, one has to remember that inflation really pops up in a late cycle environment, doesn't really happen in early cycle Environment's more of a late cycle environment. So I think you want to have spare tires in the portfolio so we are overweight energy and industrials and and some emerging markets, you know, all the traditional pro inflation type assets on

the equity sign. But at the same time, our more recent editions have been things like consumer staples that we started to add spare tires to the portfolio. All right, Richard, Before we let you go, Tom and John aren't here, and that means that we haven't talked about football yet, or at least European football. I when I think football, I think a very different kind of football. I'm not educated on this subject, but I know you like the Spurs, or,

as Tom Keene would call them, the Tots. Do you have any thoughts you would like to share with our television and radio audience this morning. Um? Well, as I've said many times, any Spurs fan out there will will know that being a Spurs fan is like being sisyphus. We get to the top of the hill and then we seem to roll back down and um it's um. You know if if New Yorkers think it's hard being a Met fan, uh, Spurs are are probably the biggest

challenge to one's personal psyche. But they're great team. I had to say, Richard, Richard to two against Liverpool. I thought it was a much better game. I appreciate it. It was a fairly controversial game, Harry Kane what he did over the weekend. But never this feels like a team that could be on the turn at the moment, so appreciate the content. Is a very good manage. Yeah, and we'll see what happens. Yeah, yeah, yeah, there's but

you see, that's that's the story is. There's always hope, there's always a sun rising, and um, we'll see what happens, all right, Richard Bernstein leaving us with a little bit of optimism, at least for the sports world this morning of our v advisors, thank you so much for joining us in Happy holiday is to you and yours. Let's continue our conversation on the fiscal part of this equation. Henrietta Trades, director of economic policy research at Beta Partners,

joins us. Now, So, Henrietta, it doesn't seem like this is entirely a done deal. Chuck Schumer wants to put Bill back better to a vote in January, really calling out Mansion on his bluff. Do you agree with Goldman that if he is a though if it doesn't pass we're going to see a real read through into growth

here in the US. I think that's a perfectly valid argument and good economic policy and thinking um the child tax credit alone, I think one of the biggest components that changes when that benefit lapses at the end of this year is it moves from a monthly payout to an annual payout. Never mind the drop from thirty six dollars a year to two thousand dollars, it's that an that monthly pay out that so many families used to

spend on food. Um that I think is going to have a material impact if you disposal income, which is you would call it for that income threshold. I think that's going to be a major driver. And then you have, of course, the near term impacts of incredible amounts of investment across all kinds of energy sectors, the health care space. It's hard not to see what this touches. UM. So, I think it's very appropriate to have a downward revision to economic forecast for two in the back of this

bill not becoming law. And may so were you surprised how strong the language was from the White House over the weekend post a Fox interview. It feels like bridges are being burnt here. If they are, is there a way back? How do they reconnect the White House and Joe Mansion after this? That's exactly right. I spoke with a number of Democrats in the immediate hours after Senator Mansion's commentary on Fox News No Less, and I think the White House felt very stabbed in the back that

they had had meetings and conversations with Senator Mansion. Even President Biden personally at his home in Delaware. Hearing the news second hand from a TV screen as opposed to getting a heads up from the senator from West Virginia was a huge blow. Obviously, the tensions have been fraud and Senator mentioned has an election coming up, and I think it makes sense for him to cross the rubicon into being an independent who caucuses with Democrats as opposed

to being a Democrat Democrats. So I think that's the direction that he's painting right now, the path that he's drawing for himself, and it makes political sense for him. But absolutely burns bridges at the White House. You can see that from the Press Secretary's response and from majority of Leader Schumer's response as well. I don't think there's a fear that he'll affect and become a Republican. But the scenario where he becomes an independent the coxes of

Democrats makes a lot of sense to me. Okay, if that is the case, that he is going to be largely and independent, how should we think about what the president can do next? Um, I've read a lot over the weekend talking about the fact that maybe what should be the focus here is fewer programs that are smaller but they last longer. Kind of what's what can be we formulated here to make to make it work that

is actually going to provide some benefit to the American people. Well, I think you have a really big problem that's beyond policy. The Senator Mansion voiced yesterday at about the ten minute mark in his program on Fox News when he said he doesn't support the current strategy in the process of reconciliation, when he said we should move to the original committee process.

What you're talking about there is abandoning a Democrat only package and going in a scenario where you need at least three or four or maybe even ten Republicans to get on board before Senator Mansion will support anything. That's a huge hurdle and we'll have more material implications than just the policy. On the policy front, I think you're not going to be in a situation where you get a permanent child tax credit increase. That bill alone would

be one point six trillion dollars. So the truncated period of time where you get you know, one to three years worth of policy is half of the course. It's very normal in Washington. It was part of the two thousand seventeen tax bill and basically every other big piece of legislation I've ever seen. So to anticipate that this

will all be short term makes sense. I think that Senator Mansion has an issue with the overall sack the bill, and so what I see is the power from here is you take inspiring the sender's package, which currently has a host of the provisions in clean energy retrofitting for your home, for example, UM and also the business expense deduction that expires from the two thousand seventeen tax bill.

Cobble those together, get a portion of the child tax credit that maybe is means tested and less beneficial for families, strip out the self deduction, and try to put that bill on the floor, maybe with a top bound of about seven billion and see where that gets you. So, Henrietta, where then is the dollar figure? If we're going to have this cobble together bill that is substantially smaller, has less provisions within it, what's the total dollar figures for

spending from the fiscal government? Coming in somewhere between three hundred billion and seven hundred billion is my new range. That's down from one point four to one point six trillion, which was my range when we were going a Democrat only strategy. Now that we're going to need potentially Republican votes and we need to make this bill smaller, my main fear is that seven hundred billion is probably the top line and three hundred billion is the small end um.

One thing I'd encourage investors to keep an eye on is an emergency supplemental out of the tornadoes that hit UH. It's like Kentucky and nearby. That's must pass. That's legislation that you can get Republican votes for. So it's not outside the bounds of UH. You know, conventional thought to see a bill passing with sixty votes in the first quarter next year, and if you can tack on the CTC and a host of the other components that have

bi partisan support. Um, I think you can get that bill done by like February eighteenth, alright, just with a smaller price tag. Thank you so much to Henrietta Trace for joining us this morning. In the central banks are instead of tightening, it is loosening policy. But tightening is the name of the game and so many parts of the world, and increasingly so here in the US. Is the FED looks potentially to raise interest rates three times next year? How are is the omicron variant? Maybe change

that calculus? Laura Ray In, chief US economist at FS Investment Investments, joins us. Now, So, Laura, given how rapidly this variant in particular seems to be swept spreading, and given now the likelihood that the build back Better agenda, at least in its holistic current form, may not be passed on the fiscal side, does the FED have to think differently than it did just a week ago on Wednesday?

You know, I think the FED is well aware that the pandemic that variants are going to continue to be a challenge, and these are gonna come fast, and they could also these waves could pass us by also fairly quickly. I think what they're really focused on right now is inflation, and of course step one is this really rapid tabor. They want to get that out of the way to give themselves the flexibility, so, you know, give it. Getting the taper out of the way and March puts March

on the table as a rate hike option. I think that's where we start to get more specific with timing and thinking about the variants where the economy is doing. How resilient we've been in the face of these challenges, because as rapidly as the virus continues to evolve, our ability to work around it also continues to improve. Okay, so we're getting better at handling the virus side of things, but we also have had monetary and fiscal stimulus at

our backs for most of this pandemic. Now the monetary side and theory is going to start to wane, and the fiscal side remains a question. In Goldman Sachs downgraded its views on US growth for not just the first quarter, not just the second quarter, already out to the third quarter on the basis and build back better, not getting past.

Do you agree with that thesis? You know, I think it's strong to pencil in the build Back Better plan is adding one percent to GDP, and each of the those orders, um, they were probably higher than my forecast for next year, which was for four percent growth in the first half and then two and a half percent growth in the second half. And that really reflects the fact that I think our economy, while still growing at a healthy clip, is just going to be decelerating back

towards sort of our long run potential. That's a combination of the lower labor force participation and to your point, the fact that these myriad tail winds are dissipating, and you know, you look at the fed rate heights cycle that is going to be a head to into our economy. Maybe not next year specifically, certainly towards the end of next year that could materialize, but that impacts things with

the lag. I do think they were on a trajectory for slower growth, which you know is going to feel weird after six quarters of just really extraordinarily supercharged exponential growth. Laura and the interest of trying to get a sense for how much build back Better contributed to up tomism in the in the asset markets and contributed to forecast optimism.

How much are you talking to clients about build back Better specifically, and and from your perspective, how much optimism was um sort of tied to this package getting past. I think the optimism has slowly been fading. I think for economists, you know, we've just been hammering that we need infrastructure spending um and it's good not only for just the economy in the near term, but for long

run productivity growth. I think for markets, there's been a real focus on real assets and that's been happening partly because of inflation, because it's an underappreciated sector that we just haven't really needed to focus on, and I think build back Better has was part of that optimism. I think the inflation narrative is still very strongly in play there, and real assets is a place that we see a

lot of interest in focus from clients. But I think at the end of the day, UM, you know, people are have been seeing this bill struggle along for the better part of a year now, and the reality is that optimism I think had faded some time ago. It's really just sort of tempered, cautious hope that something will get done right. And when you're talking to those clients about the biggest upside and downside risk to the economy

going into two. What are you talking most about? You know, inflation? Inflation. Inflation is the topic, and I actually am trying to get them to move away from just focusing on inflation to how you manage that in investing, because what we actually see is that inflation is one of the uh in a in a high and rising inflation environment is one of the most detrimental to equities, and it's a place where investors and typically underestimate the impact of inflation

on forward valuations. And so for that reason, you really need to rotate out of just these big traditional um index funds and into something that's more active and really captures the fact that equity markets for a long time now have seen this huge dispersion underneath, right, we have a small number of super charged large cap equities pulling the whole thing higher, and underneath there are a lot of equities which are not which you're struggling at this point,

and annual returns are not looking as good. So from that perspective that, of course fixed income is really I think going to struggle next year and a higher inflation and fund right, and I'm Glad you brought up the divergence going on within the equity market, because the really clear divergence has emerged between small cups and large caps

as well. When you're thinking about capitalization and the small caps versus large gaps going into two and then follow that on with style, how would you recommend crafting that

allocation going into your head? So for us, we're really again, you know, focused on the inflation protection, so focused on real assets, and I think focused on energy, which uh, you know has come a long way, but I think it's still relatively undervalue, and it's a place where, given that things are starting to feel really late cycle, I think the economy is going to be able to handle rate hikes. I'm just not sure the market is going to be able to handle it. We need to just

brace for that volatility. So I think for us, it's a it's a twofold story because we really want to keep investors rounded in opportunistic credit, in lower duration credit options, and we want to maintain the help on the equity side when it comes to the inflation challenge. Lord, good morning, it's a guy. Can I just take you back to the tape? How much flexibility do you think the FED currently has in the way that it's thinking about that type.

It has accelerated it. We've obviously learned that over the last few days. But if we do see overcrown taking off in January February, how much flexibility is there still in the process. Could the Fed manage it's maybe backlow, did a little bit more, maybe actually deliver a little bit more on the monetary front up front if we have to deal with that January February and then really push hard into the end of that type and then ultimately where where they were and where they announced a

few days back. If I were at the FED, I would be kicking myself for not having initiated the taper significantly earlier. I think right now they just need to get out of the way. They feel like if they want to really pivot towards the levels that they can pull that will actually do something to the underlying economy that the taper and the quantity of easing is really more a financial market help. So at this point I think they really need to address the inflation and be

able to give themselves the flexibility to manage that. You know, I've heard several of your guests talking about how the FED is in a rock and a hard place, and I think you know, this is the moment where they need to really give us clarity on how they are going to manage what is absolutely going to be monitor um financial market volatility, how they are going to manage through that, because it's not a question of if it's

going to happen, it's just a question of when. During their rate high process, if they are going to be focused on inflation, they need to prepare markets for that so that they don't just blink in the face of volatility as they have as we've seen uh in the last in the last expansion, Does the FED put live on or will it be dead forever? Thank you so much to Laura Ram of f FS Investments for your insight this morning. How close are we to the end

of the pandemic? That was g Gronval Johns Hopkins Center of Health Security Senior scholar trying to help us understand the threat posed by the omicron variants, and we will get more insight now. How lucky we are to be joined by Dr Peter Hotes, Dean of the National School of Tropical Medicine at Baylor College of medicine. Doctor Hope has has done a lot of work with tropical diseases

and vaccine development. Dr great to speak with you. From your view, Are we overestimating or underestimating the threat of the omicron variant right now? Well, I think it's not so much sure we're either underestimating or overestimating. I think the problem is we're missing the weak link in our response to this pandemic. We're missing that third rail, and and that's where our vulnerability is. So let me explain the further. The first the first rail is the delta

variant that's still with us, that's still surging. Now you've got O macron, which is so highly transmissible, superimposed on that, and how you're starting to see a lot of people getting infected in some extraordinary numbers put out there by the NIH Director over the weekend in terms of number of new cases on a daily basis. But here's the third piece that I think was our greatest vulnerability, and

that is our healthcare workers. We're getting symptomatic COVID, not necessarily sick enough to be hospitalized, but sick enough to be knocked out of the workforce for a period of time. So they can't come into work. And that's happening on an already depleted health system infrastructure where some we've lost UM.

Some say maybe it's of the workforce already. And now if you have all these healthcare workers at home, UM sick with breakthrough COVID because the immunity even against the third immunization wanes pretty quickly after a couple of months, according to new data coming out of Imperial College, that's the weak link. We're not going to have the healthcare personnel to take care of all the sick. Dr let's talk.

Let's dig into that week link of a little bit, because I have two questions that naturally result from your commentary. The first is, where is the length the weakest nationally? Are there areas of extraordinary weakness in this country that we need to be concerned about, either regionally or you know, suburban versus urban? And then secondly, at some point does

that weak link necessitate ultimate shutdowns? And I say this because it does seem to me that risk assets are sort of generally assuming that the U. S. Economy will not have to shut down again, we will not be forced into isolation. But I just wonder if our our links are weak enough. If we ultimately have to protect the healthcare workers, is the mechanism of shutdown the only way to do so well. The searches are happening both

in rural and urban areas. So here in Texas and the Panhandle of Texas, we're already seeing pretty bad surges on on hospitals and places like Amarillo. For instance. Here in our in Houston are Texas Medical Center, which is the world's largest medical center. There's a lot of heftier so it's it's it's probably gonna happen here in Houston last in terms of because we have so much potential capacity,

but there are vulnerabilities. But even in New York and New Jersey now where you're seeing um very high rates of O macron accounting for the variants, I'm really worried about that. You know. The problem is the country has no appetite for shutdowns, and I think that's why you're seeing Tony Faucci um sort of hold back on and even talking about that. It just there's just too much

political pushback right now and on doing that. So I put out an article in the l A Times over the weekend to see if there's some out of the box things you can do to keep our work for healthcare workforce in the workforce, and and one of them which nobody has really commented on so far, is is

should we consider a fourth immunization a second boost? Because we are seeing that very dramatic drop off from data from the UK and Germany after the after the fies are boost, it's a it's good for a couple of months and then against omicronic drops off very quickly. So what a second boost sort of keep everybody in the healthcare workforce for that period of time, knowing that it may only last a couple of months, but better than

better than nothing, and keep people on the job. In terms of the infrastructure to deliver that is it in play? How easy would that be to manage? I think I

think it wouldn't be that hard to manage. I think the problem is the public perception, because you're hearing from Dr Fauci, from Dr Collins others, and from the CDC director over the weekend how hard it is to even encourage Americans to get a third immunization to get that boost, or only about thirty of those have gotten two doses, have gotten three doses and I think they'll be there'll be a lot of hesitation to make that recommendation because it will just add to the confusion and maybe turn

people off forgetting that third immunization. So the so a lot of this is optics and how you communicate that to the American people and the healthcare workforce. Dr Hotels, you mentioned the situation here where I sit in New York and New Jersey, and I have been walking down the street seeing lines wrapped around the block for COVID testing and I know anecdotally of friends who are waiting

like a week to get a PCR test back. As we face this threat of a more rapidly spreading variant, do we have the testing capacity to respond to it appropriately, for people to be notified that they're positive so they can take the proper steps to isolate themselves. I think you answered your own question just by telling me that people are going around the block, and the answer is

obviously not. You know, we've never figured out testing. I don't understand why, I mean, why you can't walk into CVS or write Aid or Dwayne Read or wherever the major pharmacy chain wherever you live, lay a couple of bucks on the counter and say give me a home testing kit that will ask me a dozen doses, you know, I mean it's not without a doctor's prescription. I mean it was. It was never rocket science to know what

we needed to do. I just don't know why we can never organize ourselves as a nation to do so many things about this COVID response to other countries. Have all right, Dr Peter Hotest, thank you so much for your extremely valuable insight. This morning, he of course joining us from the Baylor College of Medicine. This is the

Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days some him 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 In. This is Bloomberg