Surveillance: Pricing Power With Hyman

honor and grace to Alan Greenspan as well. Evercors I s I chairman, and we're thrilled that Adeiman could brief us here into August, into Q three and into Q four of this tumultuous two thousand twenty one. And I want to cut to the chase. You've seen this out of your engineering at M. I t an ear of pricing power, It can't happen. Another ear of pricing power, it can't happen. And this time around you say there is pricing power, and corporations can to adapt to the

new inflation. How do they do it? So when we UH survey retailers in particular, they tell us that pricing power is the most Ever. We also UH survey manufacturing companies that they say the same thing and so cost her up. But independent of that, liber cost her up also. But in an independent of that, uh, companies are able to pass it along. Uh because I guess because the economy is good, people are getting pay increases. Uh. But it also is important because it allows earnings to go up.

And earnings are in a second quarter that were explosive, but I guess more important they'll be a strongly the third quarter as well. What do you see for Q four, I mean the idea year of inventing market economics into market analysis. Many would say, you did that chart paragraph, chart, paragraph? What are the chart say now about the fourth quarter? So in terms of economic growth, we have it slowing down to about six from roughly ten percent in the

second and third quarters. Uh. And but because I'm really focused on the stock market, uh, I think earnings will increase again. We have earnings in the second quarter to twenty which is probably twenty dollars ahead of the constensus, and then maybe thirty and maybe two forty in the third and fourth quarters. And that was the pe you know, something like nineteen times with Bonnils, you know, below two percent, and the dead ballance sheet increasing ADDI, uh, every single month.

As you mentioned high prices, you alluded to what you thought, but I just want to get you to emphasize it's just a little bit more higher prices in the foundation for higher prices that virtuous cycle that seems to be taking place at the moment. Is that a virtuous cycle you think overwhelms the Federal Reserve? Or is this the right kind of price growth? Um? Well, I think inflation is going to be more than expected. Uh. You know, we do a lot of work on rents and they

are surging, and that's of the core CP. I Uh, the core PC, and so real is gonna be running around six. You can do the math on what that does. Uh. And then wages have been going up, and like we discussed a second ago, priceting power is going up. So inflation is likely to to run ahead of expectations. But I think it'll settle out around and say twenty three, so it won't get out of hand, but it's gonna be higher than that it has been in the past.

And how does that shape your view some what the Federal Reserve is going to do in that kind of environment. Three cleep below where we are right now, but that high rate to change if you think that's gonna stick. I just wanted how to shape your views of money to you policy. Well, you know, I hate to stay the obvious with a thrill of discovery. But you know they're gonna they're gonna move, and they're already indicated they're

gonna move. Uh. So they'll start the taper. It'll tak you about a year uh to you know, get down to zero, and then they'll start to raise rates. Uh. And neither of those are tightening, they're just you know, less generative. And then if they keep raising rates, which will be down the road but a bit, they'll finally get a tightening position. So I feel I think the faith right now is probably behind what I see. But you know, they're they're they're moving, and so they'll keep moving.

And uh, whether they start to taper in December or January, uh, which is for the discuss and at the moment, doesn't make a big difference. I think in the big picture, do you see a taper tantrum or has that already happened? Uh? You know they Bernanke gave us a good way to avoid it, you know. Uh, he's told you what can happen. And so they've been very careful and uh trying to avoid a taper tantrum, and I think they've been largely successful.

Um now everybody is on the same page that they'll uh you know, discuss it, uh inn upcoming meetings, the Lee story in the journal today and uh and then probably by January they'll start to uh cut the balance sheet expansion by ten billions will be then you get to zero in twelve months. The hallmark of what you invented is your granularity. Folks, we used to weigh with

bated breath. Ed would sleep in and we'd be lucky if we got the report by ten am, and there'll be this big, ugly black marker on it where Hyman would say, shut up and listen to this. This is C. J. Lawrence. And then onto I s I and now ever core I s I. How does your granularity, your study of American business respond to business people that say they can't find workers? Do you just say to yourself, Ed, raise a damn wage? I mean, how do you respond to that? Well?

Pretty pretty pretty much. We'll see if there's uh an increasing wages, increasing workers when the enhanced benefits roll off in September. Uh. But you know, I agree with the way you implied. Uh, and that's what I see is t happening. Companies will simply raise pain and for what I can tell, uh, you know, at an hour wage, Uh, if you do two or three dollars, you could get a significant change and a number of people applying. You know, that seems to be enough. And so I think that

you're gonna see, you know, pretty big popping wages. Uh. Could be transitory as well, but you'll see a pretty big popping wagers. And but it's also moving up to change he set work. Black Rock is giving an eight percent across the board pay increase and uh, you know for bankers or up to a hundred thousands an hour, Yessuh. And so you know it's not just workers and im is it Jerome Powell continuing his services to the Federal Reserve system in America? We'll find out it's not. It's

not a it's not a done deal in my opinion. Uh. But I'm sure you know Bideness considering the options and considering whether or not he needs to work on it, you have having a broader uh footprint. I mean, Joe, I could see. I don't think it makes a difference if he's replaced. Um first that replaces it will probably be, you know, a little bit more beveraged than he is. And I think he's he's done. If anything, he's too delish.

But you know, I think John, what we've got to come to the conclusion is Chairman Himan would look awfully good at the eucles. Oh, there we go. I don't think it wants to respond to the don't don't listen to that guy. I'm not going to go there and don't worry beyond this though for you, for the chairman for the f O m C looking down to Washington at the moment, I think it's so difficult for a lot of people just getting the direction right. Earlier this

year was somewhat straightforward. You knew that Washington d C would be a tail wind for your GDP forecasts. Everyone was revising GDP revisions higher. It was a positive growth shark. Can you look down to d C now and characterize things for us just on the fiscal side, the range a outcomes and how white they offer you is you

try and generate a decent outlook with some confidence. So first, uh, let's not leave the monetary apart behind because it's still I think a huge tail wind, and monetary policy leads by one and two years. But on the fiscal side, uh, you know, my team in Washington, uh comes to about two trillion dollars when the dust all settles. Uh. And it's not the three or a half traying that they're looking for, but it's not one trier either, and so

I think you'll get uh, you know, more stimulus. Now that's over say a decade, so it's a couple of hundred billion a year. I say a couple hundred billions changed that till they'll win the world's changed. There was a time when a couple of hundred billions was something big. And now and I think under a trillion, you're a fiscal hulk. Chairman, ed Hyman. It's gonna catch up. If

a call and it's going to see you. Thank you so much that you want to guess right now, our great honor, to get some clarity on where we are in this pandemic. We do this with Peter Hotez, who has become nationally known many media appearances, speaking in English and also as a pinata for the anti vaccination Crow were thrilled that Dr Hotels could join us. Yes, from Baylor College of Medicine, but far more you need to know. He is co director of Parasites Without Borders with an

incredible focus on the children of this world. He's Texas Children's Hospital and dowed share in tropical pediatrics. Peter Hotez, you deal seven in children. What is the risk to our children of the delta variant? Tom? I think what's happening is it's not that this virus is selectively targeting children. I think what's happening is this is so highly transmissible. It's twice as transmissible as the previous lineage, earliest lineages

that we had. So pretty much anyone who has not been vaccinated or previously infected and recoverty is getting swept up in this along with kids, and particularly in areas where they haven't vaccinated. Well, you know, people forget that you're not getting vaccinated only to keep yourself out of the hospital your loved ones, but also if enough people get vaccinated in the community, then it slows or halts transmission, so the kids who are not eligible to get vaccinated

are protected. And that's what's happening in the Northeast, but unfortunately it's not happening down here in the South, where the vaccination rates are just so abysmal. Peter, how sick do children get? Is that part of it? The unvaccinated would say, it's one big So what is it? So what? Yeah? And so what you know of the misinformation to the disinformation out there is, you know, they quote death rates and they only point to older Americans or those with

provound underlying disabilities. That that are those who get not even disabilities, but co morbid conditions who lose their life. And the problem is we have a lot of young adults, adolescents, and even kids who are one getting sit very sick, requiring hospitalization. Now we're starting to see UH intensive care pediatric intensive care units for adolescens and some of the

younger kids start to fill up. And and we don't know the full extent of long COVID this this more long term UH condition where which includes neurologic injury, and we don't know how long lasting that is. So it's all hands on deck to try to keep the kids from getting infected. Should schools be fully reopened? Look, I think it really depends on where the transmission is. And by the way, you know, whether I think it, whether I think they should be fully opened or not, doesn't

really matter. That ship has sailed and pretty much and pretty much in person classes for a lot of the country. I think the key is trying to get the adults and adolescents fully vaccinated. But you know, like if you look in Louisiana, Mississippi, fifteen six of the adolescents are vaccinated who are eligible, maybe thirty of the young adults. It's ridiculous. So that and you have a lot of some of the red state governors refusing any mask mandates,

and you have the delta variant. You know, I say, well, you know what could possibly go wrong? Right? I mean, so it's we're I think we're asking for trouble the way we're managing this. We've got to jack up vaccination rates in the South that we're going to do well in the school year. So let's talk about the mask mandates. I go home to the home state of California, and it's l a county that is mandating masks indoors and

outdoors for vaccinated, fully vaccinated individuals. Should that be a requirement? Yeah, I mean, certainly for indoors as deltics elerates, and and the reason and certainly for unvaccinated individuals who are at high risk, but even the vaccinated ones and and it takes a little bit of time to explain, but we think what's happening based on some preliminary studies out of China and Guangdom province that this virus is multiplying at much higher rates in the nose and mouth a thousand

times more, so you're shedding a lot more virus. So even if you're vaccinated and you get asymptomatic infection, in the past, with previous lineages, the vaccine was really good at not only stopping symptomatic illness, but even asymptomatic transmission.

What's less clear now is with this delta variant. Certainly the first parameters holding that it keeps you from getting seriously ill or even uh symptomatic illness at very high rates, so that's great, But people who are vaccinated may still be shedding a fair bit of virus if they gave us asymptomatic infection. And that's the reason for for remasking. Even if you're vaccinated. The CDC has not come out with that recommendation. But that's where possibly things good ahead. Peter.

Six months ago you had the courage to publish an article linking Soviet theory with American anti science. You said anti science kills. Elaborate on that. Now was six months more knowledge of this pandemic. Well, we just have to

look at the numbers, tom right. I mean, there's the reason why six hundred thousand or more Americans have lost our lives from COVID nineteen is partly due to the stars to coronavirus, but in my opinion and equal measure was due to defiance, defiance olver masks and social distancing, not defiance over vaccines. And it's all a consequence of a massive what I call disinformation empire um, which you know, we heard a little bit about it last week and

this week from the White House around Facebook. But you know, I point out that's that's it's you know, this is so much more than Facebook. This is you know, this anti science aggression coming out of US members of Congress, out of the sum of the conservative cable news networks. We're seeing it now. It's been well reported another Russian government is trying to destabilize our democracy through what's called weaponized health communication using anti science as a wedge issue.

And then we have the non governmental organizations in at least a dozen of them identified by the Center for Contering Digital Hate. It's amazing we have to have an organization called the Center for Conquering Digital Hate that s m sixty million followers. So this is a well oiled machine or empire. And and I make the point is, look, you know we make US government puts a lot of effort into putting an infrastructure to come back global terrorism,

to combat nuclear proliferation, to combat um cyber attacks. But you know what, this anti science thing is killing more Americans and all those others combined, and we need to recognize that in so far the Biden administration is just kind of skirting around the edges, you know, throwing a few darts at Facebook. This, This won't do it. We'll continue this conversation. Dr Hotez, thank you so much for briefing us this morning with the Baylor College and that

School of Tropical Medicine. Peter oh Tis, let's head to Tokyo and start the conversation by talking about the Olympics and then ton we can move on from there Okay, John Making, my management chief global strategist, joins us. Right now, John, can you talk to me about the degree of excitement

in the city you're in right now? Well, to be honest, the mood is pretty grumpy here because of the lockdown and all the trouble that's been affiliated with the Olympics, the two and throwing from various edicts that have been put out. But essentially a good number of people are quite happy it's happening, and of course the athletes are very happy it's happening. And thank goodness that Japan was

able to uh have the Olympics here. I don't think anyone else really could have done it, to be honest, at this stage, um, so it will be quite safe and secure. All the Olympics activities are happening in a bubble here, and a lot of people will be happy when it's over. To be honest, here, and I think you might be one of them. I've got to site tell that John Foud doesn't sound thrilled about what's about type place in his city, and that is the mood here,

to be honest. Uh, if you're watching on TV, it's fun, um, but there is a sense of of skepticism about the whole thing. Here has been a sort of a burden for Japan and it's caused a lot of bad feelings to a nation. John Vale, were symbolism is everything. Is the Emperor engaged with the Olympics. Is the Prime Minister

engaged with the Olympics. Yes, they are. They will be at the opening ceremonies, although a lot of people have dropped out, to be honest, like former Prime Minister All they dropped out, and I think that there's only about close to two hundred people from Japan who will be attending the opening ceremony, so it's very pared down. I think there's about six hundred or seven hundred foreigners who will be at it, so very pared That's amazing, John Farrell,

I'm so are your entourage just two people? That's incredible. We couldn't go to the Olympics this year. I'm afraid till we couldn't make it. Do you want to talk about markets, John's we do that right now. Let's take a bit hard away from something that's clearly upset. This is no good security. Tom Equity features up twenty on the SMP We're advancing a half of one percent, John, it just feels really difficult to push back against this market.

Even with the bond market doing what it's done this week, equities were still doing okay. The drawdown was what two three four percentage points on the SMP. What is the bear case now through this year? Well, I guess you had to look at what Tom was saying earlier. There might be a surprise out of the third It seems like there are some very uh hawkish members who might descend at the next meeting. Um. There's also the question about who's going to be chairman going forward, and that's

much more important than when the FED starts tapering. And of course Powell has the job if he wants to. But if he wants it, I think, but I think there's a chance that he might say, well, I've I've done enough and retired before things get any harrier. So that could cause them uncertainty. But it certainly doesn't seem like it's gonna be earnings, doesn't. I mean, because I'm glad I'm not an analyst in the States. I mean, it's just embarrassing how how how much these companies are

overshooting analysts estimates, isn't it? John? The backdrop, of course of all of this is a ten year at one nine and it was Nico Lami and PIMCO last hour saying half of it is some of the positioning and the technicals, but some of it really is fundamental, is slowing down concerns about the delta. What do you think, Well, I think it is a combination of a lot of things. I think there's a lot of foreign buying too, maybe

especially from Japan. The data showed a lot of buying by Japanese banks, and I believe it was in June, and so there's certainly a lot of different factors going on. And people are really believed the Fed when they say that the CPI is going to be coming down. There's a boatload of money out there that needs some place to to be, and so they like to They like to be in treasuries. They were almost regardless of the price. It seems it's certainly better than European yields in Japanese yields.

Jon Vale, in the Western world, you're one of the great japan watchers. When you hear the word Japanification, the Japanification of Europe, the Japanification of the United States, is that a genuine concept for you. I go back and forth on that, to be honest a little bit. Uh. Japanification, Um, certainly in terms of the economy is not happening to the US economy. I mean, the Japan's economy has been quite dull for quite some time. The U. S economy

is bounced back strongly and inflation is back strong. Uh. You know, Japan has been suffering from deflation or no inflation, as I called for for decades now, and that's not happening in the States. So there's some aspects that certainly can happen. Certainly, the debt burden that's going up in

in the States is a former Japanification. And perhaps some of the the the attitudes about how society works is moving a little bit more Japan's way, a little bit more of the polite of version of society is opposed to the aggressive side. So there are aspects. Um. Certainly, Japan has led the way in terms of monterary policy and started QUEI started negative rights, all these things. So uh, certainly Japan has some examples to uh to show the

rest of the world, for better for worse. Sometimes I'm stuck down there, stuck down there for a long time. John is gonna catch up. Good luck for the following month, John fail then Nick as a management chief global strategist. Right now a really important conversation and an appropriate conversation for summer long ago and far away. Carl Brunner and Alan Meltzer set up summer conferences. I will be direct.

They invented the economic summer conferences, and the truths of that has been the shadow Open Market Committee of which Mickey Levy has been a member for near forty years. He of Bank of America now at Barrenberg Capital Markets is their chief economists. We are thrilled that Dr Levy could join us this morning. Mickey. There has to be a fear, a singular fear of the many shadows of our debt and our deficit. Except life seems great. How

is that? It's it's really quite striking how the public, the financial media, and financial markets seem to be ignoring the dramatic increases in the debt and not really questioning what its consequences are. Particularly Tom, it's not just the piling up of the debt, but but it's also what are we deficit spending for? Are we allocating resources in a way that's adding to UM, you know, productive capacity and UM, you know, I think let's let's be get

down to basics. One way or another, we in future generations are going to pay for it. Um. We used to think it was all going to generate higher inflation and higher interest rates. It hasn't. That doesn't mean it's good. Once again, it gets the point, how are you allocating national resources? And um, you know it's going to lead

to to slower growth in the long run. What would call Bruner and Allen Meltzer say about the two America's we've we've been dealt not only off the financial crisis of two thousand and eight, of which you are in the cross airs, but also this natural disaster we have. What would Brunner and Meltzer say would be a prescription across all of economics to get us out of this mess? Okay, One thing they would say is coming out of the

current situation, the pandemic. Um. The economic situation is completely the opposite of coming out of the financial crisis. Um. It was the proper role of the government to provide income support during the pandemic, but now you don't need any more fiscal stimulus. You've already rebounded back, and you need to um move back to normal, both in monetary

policy and fiscal policy. On fiscal policy, they would completely agree with the notion that you need to allocate more resources to infrastructure that is that is really needed, but but not more to stimulating the economy, which is not needed. Mackey, you want us to focus on the dead pole, So let's do that right now. Why is it a mess to you? What is messy about it? Well? I I wish our policy leaders were actually um debating the issues in a rational way. All we hear about is the

number a trillion dollars for the infrastructure package. Also, the infrastructure package, please note, is called the American Jobs Act. It should be called the Infrastructure Act with an emphasis on infrastructure rather than creating jobs. Um. There is little discussion at all about how the resources are going to be allocated, who's going to administer the projects, what projects are needed. That is, we should really be thinking strategically

about how to upgrade and improve our infrastructure. Also, as you've noted, the Infrastructure initiative, the American Jobs Act is being tied politically to the American Famili's Plan Act which involves a couple of trillion dollars in various income support programs, and holding that hostage to more fiscal stimulus is just not constructive. And so we need to disentang the legislation and have our policymakers address what is really needed at this time. We do not need more fiscal stimulus to

create stronger economic growth. Where are That's that's the old battle. So I'm making your issue that is not the additional dollar of debt. It's what that additional dollar debt of debt is being useful. Is that affect how of your position? Oh? I think it's a combination. I mean, you know, whenever you have the government debt to GDP rising above a

hundred um, you should be concerned. You should be also be concerned when the Secretary of the Treasury says, oh um, the FETE is keeping great to zero, so now is the time to spend more. That's not wise strategic thinking.

So I'm concerned about the rise in the debt per se, but I'm also very concerned about how what we're deaf is spending for and does that quote unquote paved the road for increasing productive capacity in the long run, because it's the continued increase in growth in the future that allows us to UH finance or debt the debt service and also raise standards of living. Why isn't all the spending leading to inflation? Well, it will, I mean the risks, Uh, the risks are inflation is going to go up. So

let me put in a nutshell. Inflation has already risen significantly higher than the FED has had earlier predicted it would. Um. Certainly, UM. Some portion of the rise in inflation is temporary, as these supplied constraints and and and supply bottlenecks dissipate. However, you do see an excel. You have seen an acceleration of aggregate demand. Okay, Now the critical issue is after this initial spurt in economic growth fall as the economy reopens.

Following that, if all of the monetary and fiscal stimulus and the pipeline, which is unprecedented, if it actually if those policies actually stimulate stronger aggregate demand as they are supposed to, then you're gonna end out with excess demand. And if those policies fail to work, um, then you're gonna have the economy go back to where it was. And most of the inflation will prove to be temporary. You know. The critical point is the risks are for

inflation to rise. And there's no question but that the higher inflation hurts lower income people than most. And and what the Fed is doing is is it's really accentuating income and wealth inequality, stimulating the economy because of the time. I want to get you in trouble with Barenburg in Germany. Tell me about the new Bundesbank from where you sit and after watching Le Guard yesterday and the revolution of the e c B, is this a new Bundesbank compared

to a decade ago? Of course it is. UM, It's it's uh. You know, the the e c B. You know when it when it was founded, was you know, was you know, the Bundesbank was in the driver's seat and UM it held to its old precept of stable money and stable price levels. And and now the e c B is UM it's in an awkward situation, but it's all about UM, you know, financial stability and continuing to ease and continuing to have its eye out on

the weak links in in the European Union. UM that means continuing with its qui and negative rates and so yes, and of course under under Leguard they've expanded the scope of the objectives of the ECB to include um, you know, climate change, some some credit and distributional issues. So so yes, it's it's it's it's a different policy making body than than it used to be. Mickey, it's gonna catch up

just to flight for the heritage of Baronberg. That with Mickey Lafey and Hulgus Smathing on the other side of the Atlantic, Mickey Laby that of Barenberg. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am 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