Surveillance: Red Hot Inflation (Podcast)

in Victor, Idaho. Lindsay, your immediate reaction to this stunning report, Well, it certainly reinforces the upward, relentless upward trend that we've seen in prices, undermining optimism that we would see some sort of near term relief now. To be fair, as you discussed earlier, the vast majority of the price pressures do seem to be centered in food and energy, and we did see some brief at least on the annual

basis of the core. But for the average American household, food and energy are two of the key categories of non discretionary spending, and so when we see slightly less pressure in terms of airline fares, that offers very little reprieve for the average household struggling to fill up their car or put groceries on the table. So this is going to amp up pressure on policy makers, both in the White House and monetary policy makers to make a

stronger move to provide near term relief. And lindsay this goes to a point that was highlighted in a Wall Street Journal article today talking about how that headline number, that headline CPI figure of now nine point one is going to matter a lot more than the core number just because of inflation expectations and what the consumer is feeling, and that the FETE is expressed much more concern about this. So what are you gaming out based on this number?

How that could change the sequence the sequence of rate heights not necessarily a seventy five basis points this month, but the follow ones September and thereafter well, absolutely Typically we exclude food and energy because they tend to be the most volatile components. So from a monetary policy standpoint, we often see the FED focused on the core, but you're right, the average American is focused on the headline number because we pay for food and energy. So how

does this translate into the pathway for FED policy. The Fed already has that seventy five basis points on the table, and this morning's report seems to solidify that seventy basis

points in just less than two weeks time. But going forward, if we continue to see these elevated levels of prices, given the Fed has told us that the prerequisite for a more benign pathway is a market decline in headline inflation, it's hard to imagine that they take a softer stance or begin to back away from additional seventy five basis point increases as we move closer to the fourth quarterer. See let's go through the estimates for this FED for year end. They've got kill p c A of four

point two. Can you just run me through how far off the mark you think that estimate already is. That's that's pretty optimistic. But to be fair, historically, the Fed does appear to be overly optimistic in terms of its growth and inflation forecast sending a more positive signal to

the market and market expectations. But when we talk about the PC, it's six percent right now, getting down to four percent, which is five months and the year left, it's going to require markedly different conditions in the international market. We're going to have to see balance restored to global marketplaces and or resolution reached overseas, neither of which the FED has control over. The FED can only raise rates and tap down the demand side in terms of price pressures,

but it cannot control the supply side. And I fear that in order to get that optimistic level of four percent by the end of the year, or nearer two percent, as the FED projects by the end of next year, we will have to see vast improvement in international factors. Lindsay domestically, I just want to understand how father Fed's

going to push it. They can't say everything you've just said, because then they rise a credibility issue, and you know if they said that, what would happen with this market? It's the FED back in a way equities with rallied credit spreads with titan, that dollar might weaken. How far

do you think this feed is going to push this? Well, according to Federal Reserve Chairman Jerome Powell, he is willing to push this as far as needed, even if that means a market decline in domestic activity in order to get inflation under control. Right now. They are hyper focused, solely focused on inflation and that is their key objective,

getting that price stability. So if they need another seventy in July and three more seventy five rate hikes by the end of the year, I think they'd be willing to do it. Do I think that's the appropriate pathway? Absolutely not, But I think in order to maintain credibility and try at least and get some sort of of

relief from prices, that their hands are tied. That's all they have, just the mice and thank you scp X of the st Michael O'Rourke, chief market strategist at Jones Trading Today, Michael, how does your world change with the nine point one print? Well, I mean it's very consistent with where we've been. Obviously, we've seen this inflation rising

for over a year now. Markets have been concerned about it and the main concern is that the Fed's been behind the curve and that was proven true once again today. So I expect investors to continue to be defensive and I think it's gonna be a rough road the second half of twenty two. Does this inflation read Michael, change anything in your view? In your trading strategy today. Uh, it doesn't. Obviously, there was a lot of hype around this number, a lot of high expectations that the number

would be um hotter than expected, and it was. I will say the one I guess the bright spot in there is the fact that the course cp I continued it's slight down trend, and that you know that peak was still at six six point five, your your growth back in March um and then when you look at w TY crew being around a hundred dollars and starting to come back in, if energy continues to come back in,

that would be a hopeful sign. But the problem is is we're still looking at asset valuations that are still pretty expensive relative to where the economy is, and the fact that we have significant rate rate hikes ahead of us. How much does core CPI matter going forward? And how much is this purely going to be a headline figure for a FED trained on consumer expectations. Well, you know, as you noted, the FED is focused on the headline

right now. But as long as the crew keeps coming down, as long as energy prices come down, or at least they've put their peak into for this cycle or this move, then core becomes a more meaningful number, and you can see expectations shift towards the focus on core. Obviously, if if we continue to have an energy crisis, that if there's another flare up or we see w T, I make a run back towards the headline number becomes the

focus again. But I think in the seecond half of the year, I think um people will start to shift a focus towards cores. Again, it's still not a pretty situation, but obviously it's not as terrible as as a nine point one percent year of the year growth reading looks.

C IBC reporting in from Toronto, Catherine Judge, as we noted earlier, she says Shelter a major contributor in Katherine Judge really quite importantly on the deceleration of Michael Rourke just discussed really saying this is so much base effects, which is some mumbo jumble for looking back twelve months if you will. We won't go into that right now, Michael. The thing that devolves down to is the earning season which begins, I believe Lisa it's tomorrow as well. How

does inflation devolved down to the revenue view forward for corporations. Well, it's tricky here, right. I agree. Here you're seeing these these good revenue numbers because people have been raising prices. But Delta Airlines might be a great example today. Obviously they're they're talking about how strong businesses, how much demand there is, right, but they missed on the bottom line. And you know, if you look at their earnings, I think X energy there, their costs were up versus H versus.

So I think that that's that's the squeeze. See. I don't think you can trust the revenue number. I guess per se, and you really have to watch and see where the margins are being squeezed for profits. Michael Rourke, thank you so much. With Jones trity that they right now. This is something we rarely do but because a water hazard on Bluemberg radio. But when you can get someone standing in the South Fork of the Snake River in a drift boat U fishing away and speak to them

at radio, it's always constructive joining us. The fisher person David Kotak joins us this morning with Cumberland Advisers. David, of course you're out in Idaho talking economics, but is there a little bit of fishing going on for the acclaimed Yellowstone cutthroat trout. Absolutely, Tom, thank you so much for having me. And it's nice to be with you and pretty and pretty and you can come fishing with me anytime. I can't find waiters long enough to fit. Tom.

You got that right. I've turned this down for years. I don't you know. I'd have to have Critty put the worm on the hook for me right now, David, you and I are the only two in the planet that remember inflation like this. But you and I also know this is different out of pandemic and massive fiscal stimulus. Explain to our audience coast to coast, shell shocked at nine point, why this is a different inflation. Yeah, this is a different inflation. And and thank you Tom. The

you have to back the way. This is not a business cycle. So we have a shooting war widening in Europe, we have a worldwide financial sanctions payments war. We still have a pandemic, and still have COVID shocks. One of the pannels that I'm doing and tomorrow in the Victor Idaho is on long COVID. Millions of people with disability and the labor force, and we have massive political turmoil, including a country which is having a war between the states. This is not a normal shock, it's huge, and so

shock response is what financial markets are dealing with. You've been talking about it this morning, and I really appreciate a forty year old the story you told about Detroit. It makes those of us who have a perspective of history enable us to respect the history. Thank you for that. Well, I have to let's talk about the history. Tom has reminds me over and over and over again this morning that a negative sixteen yield curve in version that we're seeing on the two tens curve will put that into

perspective of the vulgar area. And you saw an inversion of negative two hundred, right, so this is something that you actually haven't seen going back to two thousand. Can you occurrent versions way rarer cretty than you think? Well, it's funny because I feel like it's all we've been talking about for the last couple of months, David, how much faith? How much stock should we put in this

curve and version that keeps getting more and more negative? Well, I just I just published and not long ago, a pencil and eighty pages of data. But it compared two metrics and Neil Kers the took ten which everybody's talking about looking at, and the old Bobbler rent comparison of the very short term rate and the long term saying treasury bills is this thirty year treasury bond? You must, in my opinion, look at both curves. When all of them are flat, we really encounter trouble. And right now

the long short curve is not inverted. The middle is inverted. And so that's a mixed message. So I'm not all up in arms over to ten if the short rate, which it looks like it's coming, because I agree with ira and and your conversation earlier, We're gonna get seventy five. We're gonna get seventy five again. We're going to take a Fed funds rate somewhere between three and four ten year treasury where's it go maybe close to four um. That's an expectation, and that will cramp down the US

economy hard. We're already seen some of that in the data flow today. David, are you seeing this in Florida? Come on, Florida is a massive book critty, Who do we know that's not moving to Florida? Florida or Austin, Texas. Right, yeah, I mean, what what is the state in your Florida David Kotak, Well, if Florida have two things going on.

When we have a public health policy which is ignoring public health that isn't causing outward movement in some businesses and service sectors and events, and we have an influx of people, and the influx of people look at no taxes and they want to move from someplace else. So it's a mixed picture in Florida. I am not so sanguine about Florida. Now we need a good hurricane. Watch what the shock will be. You talked about heat in Texas. Come to Florida. It's ninety degrees and ninety humidity all

the time. David, we got to talk about investment because you've always been a Cumberland adviser is very clear about your investment exposure. Now what are you exposed to? And may I guess it's municipal bonds? Well, Muni's on the on the eyeside. We have been very heavy on the by side, long muties above four, high grade tax free.

So that's one side. On the stock market, US stock market, right, U S C tf strategy portfolio is in cash, it is in the quantitative work, and the other remaining fifty is in defense, health care, and some selected smaller sectors. We are very negative on the outlook near term for the stock mark. When can you buy big tech? Joe Feldman marked down Amazon today, left it outperformed, but took it down just on any but dot tweak? What do you do with big tuch? I'm underweight, Tom, and I

don't think this blood bleading is over. David, Thank you so much. Get back to fishing on the south fork of the Snake River. Critty, I just live vicariously through these guys. There's a lot of nature involved. Clearly, it's just you know McKees either, you know buying based at the Red Sox at Fenway. Parker is off some trout fishing farm with Ellen Zentner, and they're not They're like real trout. You know, these are like wild I think, like wild trout? Can I make it even worse? They

get paid to do that? How exciting is that? It's very cool? Right now? We wanted to do this, which is get a snapshot of the German people and how they will react to the tumult that is on the Bloomberg screen. Leanna Fix is expert at this to say, she's programmed director where the work at London School of Economic She's at the Corporate Foundation UH in Germany and truly an expert on what the German people do. Leanna, thank you so much for joining us in Hamburg. In

January the lowest thirty one degrees fahrenheit. In February thirty two degrees fahrenheit, in March thirty six degrees fahrenheit. What

will the people of Hamburg do this coming cold winter? Well, I think you're very well to say that there's a lot of uncertainty and a lot of fear among the German public, not only about the prices, about the energy prices that will um that are rising, about payments that they will have to make at the end of the year that might be twofold, threefold, fourfold as much as they've paid in the past. But there's also a concern whether there will actually be parts of the population that

will not be able to warm the households. Especially the news that some communities are preparing centers where you can need to keep yourself warm has sent some quite some shock waves through Germany. So it's something which is observed very closely for Moscow obviously, and we see how Moscow tries to play this game and to create even more fear among the German but also among some of the European publicists. In your research note you say that Mr Putin works from fear? Can he bluff here? I mean,

what is the level of bluff? What is the level of the input of fear that Mr Putin will do well? He has a short term advantage because the increase in gas poises leads to the surprising effect that Russia gets as it gets revenues from gas as much as it needs and even more than before. Although we do have an oil oil sanctions from the europe Union that will kick in at the end of the year, but at the moment, Russia can afford to reduce the supplies for Europe and at the same time it gets enough we

venues to sustain its own state budget. Um. This will change in the medium to long term, but at the moment this really gives Russia the opportunity to put pressure on Germany and on Europe, and we will probably see that the nod Stream one pipeline will not on to its previous supplies and capacities, but will probably be slowly

would use by by Moscow. You know, one of the parlor games right now on Wall Street is trying to figure out what the implications would be should the pipeline get shut off an entirety versus fifty percent capacity resumed, etcetera. And all of these potential outcomes from your perspective, how quickly is Germany moving to really replace those gas supplies?

How quickly could they be independent of Russia gas in the face of some of these huge economic concerns that people are projecting in We've seen that Germany has moved quite quickly when it came to Washington oil, surprisingly to everyone, Germany agreed to oil sanctions that will come at the end of the year. But gas it is more difficult.

So there are a lot of attempts to get allergy gas to construct allergy terminals because Germany didn't have any before it was so dependent on cheap washing gask coming through the pipelines their travels to cut time and to other countries. But this will not be enough. So in case the nord Stream one pipeline will be shut down entirely, which is probably not as likely as a slow decrease from the Washington side, because then they will still get

wevenues from the nord Stream one pipeline. But if that continuous, Germany will have to reduce its DAS consumption quite significantly, the estimates of between twenty and thirty of reductions, and this will obviously be a challenge, and it needs to start now in the summer, not in the winter, because we need already now in the sum of those efforts to fill the storage. And we've heard that a lot over the last few weeks, and I was grit to

catch Emily unaffixed that and they call the foundation. 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 In. This is Bloomberg m