Surveillance: Persistent Inflation with Li

yours on a recession in Europe. You've been on top of that story for a while. You've pushed the same story recently, and you've asked the question why equities pricing kit and you're not alone widely. Why do you think that's the case. Why do I think equity is pricing in not a recession? I think there is a lot of hope in market that the innovation of corporate would eventually continue to come through and margin will stay elevated.

But in our view, actually that is unrealistic to to expect that in this environment where coastal production is going higher, labor shortage is prevalent, not just in Europe, in the US as well, where I am right now, it feels

like I'm man in your studio for you today. In that kind of environment, we expect margin to actually come under pressure, and eventually the current market consensus for earnings growth, not just in Europe but also in the US will have to come down to meet the reality that we are heading into a recession in Europe this year and one in the US likely next year as well. Realie, I find your note to be the Grimce note on Europe I have read and will not mince words about it.

It's very, very difficult. Does Madame Leguarde have the nominal GDP firepower, the economic animals spirit to affect the rate path you suggest? Can? Can do? They have the interior structure to do higher interest rates. I want to pick up on something that Lisa talked about, which is this idea of own reality. Right, So, we're in an environment shaped by supply constraint, which is very very different from the Great Moderation that has been shaped by demand and spending.

And in this environment, actually the tradeoff facing central banks are so much harder, the trade off between growth and inflation, and so far what we have heard from Madame la guard is perhaps some leap service to this tradeoff, but not really acknowledging how costly it would be to actually bring down inflation through hiking rates and what that means for growth and what that means for the labor market.

So we believe that until central bankers acknowledge that tradeoff and choose to live with inflation, we are going to be in this environment for an extended period of time where the politics of inflation will be prevalent instead of the economics of inflation will, which will become clearer as we enter next year. But right now, all eyes and fighting inflation, which based on what we saw yesterday, the

core part of inflation is proving to be sticky and persistent. Well, a lot of people would agree with you about Europe, and you're hearing a lot of notes are reading them that are saying underway Europe, it's not so clear. In the US, it's not consistent in terms of the messaging. How far away from realistic pricing do you think we are in equities even after what we saw yesterday? Right now, obviously markets are moving very very quickly. Yesterday very dramatic self,

but today bouncing back a little bit. We believe that actually more needs to be given back to properly reflect the fact that we should be looking at the earnings recession. So right now, if you look at your today market pricing, we think that actually the rate path is to some extent fully uh reflected in equity pricing, but the fact that earnings is going to store uh greatly is is

not yet reflected in comparison. However, credit is pricing in a version of growth stalling, which is why in a whole portfolio context we prefer to own credit over over equity and just building on this this idea of un reality. UM. Now, Lisa, you asked about the US, we also believe that the Fed has yet to acknowledge the very difficult trade off

between growth and inflation. UM. Will pay attention to the economic forecast next next week, but in our assessment, actually in order to bring inflation back down to two percent over two years, we could be looking at three million additional people out of a job and also deep procession, true present contraction, which is currently not being talked about.

This is the sort of tough tradeoff that we're looking at in this environment shaped by supply constraint, and we think that markets will wake up to that in time. Welly of Black Rock White Fantastic as olwise right now and this is the most interesting time to speak to the gentleman from Rice University with mechanical engineering is a background, he went on to engineer all sorts of efforts in

private equity and venture capital. He's the governor the Republican from Virginia, Glen Youngcan, and we're thrilled the governor could join us this morning. Governor, I cannot think of a time to speak to you with someone who's pro business, pro innovation, dealing with the Republican Party that wants to bob bomb Rob Portman and the rest. Back to an anti business time? How anti business anti young Can is your Republican party? But I don't think the Republican Party

is anti business. And in fact, Republican governors all over the country have been leading the recovery coming out of the pandemic. And that's exactly what we've been doing in Virginia. We've got taxes down, we're open for business. We're seeing great announcements from companies. We have a lot of open jobs, and that's one of our biggest challenges is getting people

back to work. I am really concerned about the inflationary policies that we see coming out of the Biden administration, and tom we see the ramifications of that yesterday, which is and anybody who thought that this was going to be short lived has been shaken because what we're seeing is the persistent result of bad policies, inflationary policies, with grocery prices up, fuel prices up, and Virginians and Americans feeling it in their wallet and they're having to make

compromises as a result. We have iconic American companies moving, for instance, from Chicago to Greater Washington, d C translated Virginia. We've got entrepreneurial companies such as your announcement today on an innovative company and on a wage basis, they're competing with Amazon, who's lifting compensation for drivers and hundreds of thousands of their employees. Is there a wage spiral in Virginia, Well, there is a There is a real wage inflation challenge

um there. These these wages are growing, but they're not growing as fast as inflation and and the cost of living. I am really excited about these new companies that are coming, like Plenty Unlimited that we're announcing today that is going to build the largest indoor growing facility in the world, and we're gonna see them right here in Virginia. They're gonna compete for talent. This is why we have to get people back into the labor force. We've seen labor

participation drop substantially in Virginia. We were up near sixty seven percent prior to the pandemic, and unfortunately we dropped and we're in the sixty three and a half percentage is now. We've got to get people back to work. These great jobs, these next generation kinds of opportunities will pull people back into the workforce, but we've got to stop all of the underpinnings that have encouraged them to stay home and out of the workforce and get them

back to work. Governor, this indoor vertical farming company and the indoor vertical farm that you're espousing really speaks to an agenda more commonly associated with the Democrats in terms of trying to make things greener and make things more modern with respect to the carbon footprint. Do you find yourself bumping up against that stereotype when trying to have a more modern approach that brings in more young workers. Well,

not really. I mean, agriculture is Virginia's largest private industry, and technology is one of our fastest growing sectors. And so to bring agriculture and technology together in the common and Wealth of Virginia makes perfect sense. And in fact,

we have absolutely become the hub. With today's announcement with Plenty, which is going to build a three hundred million dollar facility right outside of Richmond, three hundred new jobs, and our announcement two days ago with Aero Farm, we will have the first and second largest indoor growing facilities in Virginia. And yesterday we announced another company being stock expanding their facilities.

So we're bringing together our agriculture roots are technology future, and UH forging the way for for an industry of the future. A tech uses far less natural resources as higher yields and and and a great product. And I just think this is part of the future of agriculture

is happening right here in Virginia. Just real quick, Governor, I remember speaking with you when you had your private private sector had on about infrastructure and plans that you're looking for, and I'm wondering now that you're in the public sector, if you've been surprised by the partisanship that prevents certain things from happening. If you've been a surprising the other way, well, I do believe that investing in infrastructure broadly is critically important to facilitate growth. I mean,

we're seeing capacity issues across our infrastructure. I mean we're still rated a D as a nation. We gotta address this. So we're doing it. In Virginia. We moved up substantially in the rankings that infrastructure. Our port is being deepened and widened, our road infrastructure is being improved, Our connectivity and broadband is taking a huge step forward. And this is the kind of progress that we must make. We're doing it both with government led things, but more importantly

with public private partnerships. And I think investing in infrastructure will continue to be one of the great challenges and the great opportunities in Virginia in the nation at leasta is that one step closer to asking about count interest is that what you want to store at the government next at a time, so you're you're you're in luck. Going on. Now, we have some technical problems to stop the interview, so we have run out of time set.

But next time we love alonga conversation. Governor Glenn Young Cannett of Virginia. Governor, thank you right now, and this is really an honor because I can give you a story about how economists becomes stars. Michelle Meyer. There's a MasterCard economics institute, but far more. One day a girl fell out of Boston University and everybody stopped and said, wow, does she know housing? Michelle Meyer joins us now after years at Bank of America and truly expert on your

next mortgage and rent payment. Michelle, let me cut to the chase. How bad is it? How bad? And how persistent will the housing inflation be? Well? Thank you Tom for that wonderful intro um. You know, I think the big challenge for the housing market right now is simply affordability,

and that comes from two factors. One is at home prices increased at an extraordinary rate across the country of the last two years running and double digit rates for the major metropolitan areas by our metrics, And we looked at home prices relative to income growth across all of those really specific metro areas. About sixty five percent of the country is considered overvalued. So you have that coupled now with this extraordinary increase of mortgage rates and that

has created a huge shock to the housing market. So, as you know, homesales have been falling steadily since the beginning of the year. Right, multi family to the rescue. That's what always happens in the cycle. Can multi family come to the rescue in Nashville or Denver, never to the rescue in New York. But as multi family, are

we getting more units? We are? We certainly are. I mean, if you look at housing starts, they're still running above what you would consider to break even rate, particularly for multi family UM. And remember the lags with multi family is while it takes about a year from the beginning of the project completion UM on average once the construction starts. So UM, you know, you had a lot of projects that were ongoing, the development was happening, and now you're

starting to see those completions. So you're starting to see those projects enter the market in a bigger way. So you still have supply hitting the market, particularly in the multifamily space UM and that should help because you can have some conversion from owning to renting given the affordability strange in the housing market, But look at owner's equivalent rent um in last yesterday's report and c p I

that is accelerating further. UM. So there's still rental pressures as well, which further strains affordability across all the do about that, What can right hikes do about that rental price pressure with same build Well, I would argue that that transmission from monetary policy is quite apparent in the housing market right now and will be increasingly in the

rental market as well. You know, these are interest sensitive sectors, UM, and the fact that the fat is increasing as rapidly as they have, and you'd argue, for reasons that are quite clear to contain prices and inflation UM, that increase in interest rates has slowed down demand of housing and in turn it will put that type of downward pressure on on home prices as well, on home price appreciation,

which then spills into rental inflation. But that all takes time, It is not immediate, but I would argue it's already underway that transmission, well, at least on the housing price side, but on the rental issue, I just want to pick up John's right to bring up the fact that rents are still climbing and faster than people have previously expected,

at least based on the CPI report from yesterday. And there's an argument that the higher prices go on houses, the more people are forced to rent, the less affordable it goes, especially given uh the high mortgage rates. Where is this potential for an overshoot at the same time that the people who are least able to handle inflation

are feeling all the more pain. Yeah, I mean, look, these are these are these are certainly some of the challenges here in terms of finding that ultimate equilibrium in the economy after creating you know, some real imbalances in terms of excess stimulus UM and I think you know,

the adjustment is happening, but it's not complete. And in the interim, yes, you've seen this, you know, some push into owning to renting, which is increasing demand for rentals when there's still some um, you know, lag in terms of getting all that supply into the market. But it will come. And frankly, you know, one of the ways it will come in terms of normalizing inflation, normalizing particularly rental inflation, is through the demand side, UM, in the

sense of weakening the broader economy, particularly labor market. UM. You have a bit of an income shock and then naturally you start to see that feed through UM. And that's what the share Powell I think it's been saying quite clearly, which is that they are keenly focused on price stability and reducing inflation, and that does mean, you know,

sacrificing some real growth. But this really leads to the question of how much pain needs to be inflicted on this economy or how much pain will be inflicted on this economy based on the rate hiking cycle being priced into the market in a way that we are not anticipating because of the lag time, because we're not seeing it yet in some of the metrics. What's your sense

of how likely or unlikely a hard landing? I hate using that, but a recession that somewhat significant is given the report that we got yesterday on cp I. Well, I think the report yesterday show two things. One is that you are seeing relief on the supply side, and that you know you have. We've seen a drop in energy prices, UM, we're starting to see some easing of goods inflation. That and more should come given what you've seen from container costs coming down, supply chain issues easing,

but the demand side. There's still a lot of inflation there and the services economy is feeling that. Um So for the FED that has a lot more control over the demand side, it does give them that type of you know, pushed to continue to raise interest rates cool down the economy, and least to your point, it is taking time because the starting point was really high. As we've been talking about, as I'm talking to you off the last few months. The consumers healthy, there's strong balance sheets,

consumers still out there spending and they're navigating this inflation environment. Okay, Michelle, you've been brilliant on the end. Of course, you've got all the resources, a master card to figure that out. Jim Glass when a JP Morgan is pushing against the gloom like no one I've ever seen in the decades he's done this, help us with the Glassman Meyer consumer.

How boomy is the consumer? Right now? Look from our dad, we're looking at our our spending pole Stata for the month of August, there was an acceleration in the year year growth rate of consumer spending. And that's you know, even controlling for these movements and gas and oil and autos et cetera. So like the underlying demand that did accelerate. So we'll see what the retail sales report shows tomorrow. But you know, it seems like we're up Thursday, retail Thursday.

She will give her credit for it right now. Joining us on a phrase, it is simple how to invest, and the archway to invest is to not lose money. David Rubinstein is with as co founder of Carlisle Group and author of the new book How to Invest. David's just a great concept, and to me, what's important here is the team you have at Carlyle, which can talk about log normal distributions and tail risk and all the other mathematical bladder. The foundational issue is the how to invest.

How to make money over long term is to not lose money. How do you avoid losses in investment? Well, if you're really investing, you're probably not going to be avoid losses at some point. No great investor has been able to avoid losses at some point. Even Warren Buffett has lost money on investments. So you have to be in the game and recognize if you're reasonably good at it,

you'll probably make more money than you'll lose money. And what I try to do is to interview some of the best investors in the United States and talk to them about what their secrets were, how they got where they are, and what they would recommend to other people who want to be investors. Part of this is a definition of short term. How short is short term for

the different chapters of your book. Well, of course, some investors are trading daily, but for people that do what I have typically done, which is private equity, it's a longer term investment hold, which is typically three to five years. Clearly, people like Warren buffet or holding almost forever. But I'd say generally investors who put money to work are trying to get some kind of good rate of return somewhere between the three and five year period of time, typically

in the private equity or venture capital growth capital areas. David, were you surprised what any of these aminary is said in terms of their investing secrets of their mantras. Well, I don't know if I was surprised. I've known many of them over the years, and so I've I've really spent some time with them before. But generally, what they would say is that you have to take some risks, and the great investors are basically going against conventional wisdom.

The conventional wisdom will say to sell, and the great investors will say now is the time to buy, or vice versa. And the most common mistake that they all felt people make is that when the markets go up, people tend to get in. When markets go down, they tend to sell, and the great investors tend to do the opposite. When markets are in trouble as they are now, you could argue, now it's probably a pretty good time

to invest. You won't see the results of your investment for two or three years if it's successful, But generally people are now really skilled investors I think are buying things now at the bottom of the market, are close to the bottom of the market. Hell has investing wisdom changed, or investing beliefs, as we've seen a complete change in the technology underpinning a lot of it, with a lot of it done more quickly, democratizing in many ways, who

can get in, how people can trade. What used to be investing was really something available only to the top wealthiest people in the in the country, or in the world. Now everybody can participate and invest alongside some very good investors by going into their funds. One of the big changes is that the rate of return was always the most important thing. The highest rate of return you could legally get was what people wanted. Now people do worry about things like E s G. That was not a

factor ten or twenty years ago. Now while E s G has been on there some attack lately, there's no doubt that E s G factors are important for a lot of investors, and for institutional investors as well. David is the next hour we will witness a Queen of the United Kingdom with her coffin moved through the door of Westminster Hall. It is an ancient, ancient edifice. It is as ancient as what you brought to America, which

is a copy of the Magna Carta. Please explain your view is the one that helped the National Archives with our heritage. Please explain the reach from the time of the Magna Carta and Westminster Hall to Queen Elizabeth Well. The Magna Carta was designed and there are versions of it from twelve fifteen the twelve ninety seven to give people and generally the wealthier people at the time, not really the average person that had later evolved, the benefits

of things like trial with juries. Uh no taxation without representation, right to habeas corpus, things like that. Interestingly, the Magna carta became less significant in England for a while and became more significant United States because when our charters were drafted for the colonies, that thirteen colonies, they typically had the rights of the Magna carta or has put into

those uh those charters. So in many ways, our revolutionary war, which was against England, ironically was really based on the premise that we had the rights of the Magna carta. Many people in this country believe that they had those rights because they were guaranteed in the colonial charters, and for some period of time the Magna carta became much

more significant in this country really than it did in England. David, we we see a United Kingdom with the changing of Prime Minister and clearly from their chancel the exchequer a growth at any cost strategy. Is there any history where growth at any cost works well? Growth and any cost will just produce inflation typically, So I think you have to be careful about any type of growth. I think the English economy, of the British economy has some real

challenges now more than even the U. S. Economy. I think Brexit has had some uh impact on Britain that probably is not as favorable as people would like. I think also the global the economy is not as strong as Britain would like or the europe would like, and I think the European economy is behind the US right now. Inflation is probably as high as in the US, but the growth is much less likely to go forward than

it is in the US. So I think the British economy has some real challenge just now forecasting a recession here in the UK. The FET's not got around to doing that in the United States just yet. David, fantastic to catch up with you sat as a wist, David Rubinstein. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m Eastern.

I'm 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