Surveillance: Reducing Prices with Deese (Podcast)

Com and of course on the Bloomberg terminal. The dynamic of the morning will be the Oval Office with the Chairman of the Federal Reserve System and his President, joined by the Secretary of Treasury, of course, the former chair of the FED, Janet Yellen Powell Yelling and Biden. Brian dis joins, Director of the National Economic Council, who will be in charge of niceties and pouring tea at the meeting. Brian, the singular distinction here is Yelling codified the words slack

of an America unemployed. That is not the case now, power is Fed is roughly fully employed America. How will the President listen to these two about jobs in America and this horrific inflation. Well, he'll listen to them, and he'll underscore his core point, which is that he intends to provide the FED with the space and the independence

that it needs to operate. As you all know, he has nominated a quality slate of people, including at the top of that slate Chair Powell, to lead the Federal Reserve through this challenging time, and he intends to give them the space to operate. But we are in an environment, a unique environment, and we have unique economic strengths right now, the job market in the labor market being chief among them,

but not the only one. Household balance sheets are in a very strong position because over the course of this recovery, Americans have been able to save more and pay down debt. We've seen we're seeing business creation, small business creation up at record levels. So we have unique economic strengths which position us well now to focus on this challenge, which

is bringing prices down. Obviously the Federal Reserve place a primary role in that, but fiscal policy and the economic choices that we make with Congress play an important role as well. Will be all of that will be on the table today. Brian. Let's talk about that meeting today and whether it's anything more than a photo. What given that you've said you don't want to comment on Fed policy, the Fed doesn't want to comment on fiscal policy, What is the purpose of today. If it's not just a photo,

what what do you discuss? What comes out of it? How does it aup Americans? And you've seen the policy yourself. Six of adults say their families income is falling behind the cost of living. So a lot of people looking at this it feels just like a photo. What for Americans struggling right now? They want more than just that? Is it more than that? Absolutely? A couple of things. The first is its standard practice for presidents and chairs of the Federal Reserve to meet from time to time

to share views on the economy. In this case, secondly, the president is underscoring something important. The respect for the independence of the Fed as an institution is not something that we can take for granted. It's not something that prior presidents have done to re underwrite that independence, and so doing so, having the president do so in a public way and underscore that he has committed to making sure that the Federal Reserve as an independent institution can operate,

is incredibly important at this moment. And it's not just about a photo op. It's about sending that signal clearly to the public. And number three, they have a president. The American people those who are feeling anxious, and absolutely understand that when people go to the gas pump or to the grocery store, they are feeling anxious. They have a president who is waking up in the morning and focused on how to address that challenge. And one of the things he can do is, in his position, underscore

the independence of the Federal Reserve. So I think for all of those reasons, this is an important step in the process, not the only step, and we are going to remain focused and over the course of the next week and the week after that will focus on the steps that we can take to help try to address price increases as well. One thing on to discuss, and we know this from several reports, and we've talked about this previously, bran is student debt relief. The White House

considering something up to ten tho dollars. There are people without a college degree wondering why those with a college degree are getting this. Help. I'll go through the numbers and then I'll ask for your response. So the latest research from Pew points out that for intent Americans age twenty five year older have a bachelor's degree or higher. Among that, as you know, for black American adults. For Hispanic adults, that number is much much lower than four

in ten. You also know there's a growing garning scap between those who have a college degree and those who do not. The unemployment rate is a lower for those that have a college degree compared to those that who do not. So the question Brian, that people are asking if they don't have a college degree right now is who is that to help? Who are you doing that for. Why are you considering doing that? Who is it for other than just energizing the base going into the midterms

later this year. Well, first, we should be trying to help everybody who wants to work get into a job that will give them pay and an upward mobil an

opportunity to succeed. And one of the things we're seeing about having such a strong labor market recovery right now is we're seeing historic gains not just overall the largest declined the unemployment rate in any recovery in recent history, but also record gains for Blacks, record reduction in the unemployment rate Hispanics, the largest reduction in the unemployment rate for Hispanics ever on record. So we're seeing that in the job market. We want to do more. A lot

of that is about workplace training. You should jump in. I just want to now down the point because you know this is important. As you know, and I'll repeat it, those with the college degree seemed to be doing much

much better than those without. As you work at relief for the American people at the moment, why is their focus on ten tho dollars of student debt relief at a time when those people in America who do not have a college degree again squeezed by gas prices crewed again this morning at one eighteen, JP Morgan saying, gasket hits six dollars later this year. You know the people that's hitting the most, many of those do not have

a college degree. Why is this administration focused on doing something which, let's face it might play well in the midterms, but ultimately isn't going to help those people that need the help the most. Right now, my point is we're we're focused on trying to help everybody. But to the question of those uh and and a lot of the steps that we are taking are going to help people

who have less than a college degree. But when you look at the issue of student debt, there are tens of millions of Americans out there who um are in the labor market and now may have gotten some college education or college education, but are held back by the burden of having to pay in some cases extreme extraordinarily

high debt. So the question there is is are there steps that we can take, prudent steps that we can take to try to help unlock economic opportunities for those families, while at the same time doing everything we can to help create a labor market that is creating dynamics like the one we're seeing now where for the first time in a very long time, people with out of college degree, people with some college degree are seeing economic opportunities, opportunities

to move into jobs with higher wages that they haven't in some time. We're also focused on trying to sustain that and continue that going forward. Right, and good to catch up, as always, always fantastic to get your perspective on things. Brands there of the National Economic Council joining us now as Peter Roppenheimer, Chief Global Equity Strategistic Garment Sacks and Peter, you put out the note yesterday, So let's start with your research. What happens after you've seen

peak inflation. So work through it with us. Have we seen that what happens next? Well, I think that if you look at the history for markets, at least when you get peak inflation, you do tend to get a recovery and risk assets, and that's generally because it starts to alleviate pressures on on interest rates. By that stage, you've usually had markets already pricing and an economic downturn. So at the point where people think that things are bad but getting less, you tend to get a recovery.

But it's important to say that there are variations around this theme. After all, you know, an inflation peaked in two thousand one, markets were still falling because of the fallout from the tech bubble, and similarly that was true around the financial crisis. So I think we've got a

little bit be a little bit circumstanspect about this. Generally, I think if inflation peaks, it will provide some relief, but there's still the ongoing uncertainty about the scale of the slowdown and growth, and until we get more evidence that the rate of deterioration there is slowing, I think markets will be a bit volatile in the short run.

Peter paint a picture of how corporations adapt, not sector to sector, but as a general statement, giving new almost jump condition move in inflation, how do corporations adapt and adjust well. I think there are two things that are important to say. One of them is that, uh, you know, inflation is generally rating higher nominal GDP. In a sense, growth is not the problem to your point earlier, Tom,

The problem is is margins and bottom line. You know, equities companies are making a claim on nominal GDP growth. Nominal GDP is actually quite high relative to the last decade. The question is how they can cope with higher costs, what that does to margins, what that does to earnings in the bottom line, and their valuation. I think the second point to mention is that we're in an environment now which is very different to the one we've seen in the last couple of decades, when both commodities and

labor were easily available relatively cheap. And now we're in an environment, probably structurally, where both commodities becoming more scarce, more heavily contested and competed for, more expensive, and labor as well. I think what that will do is encourage more companies to invest in greater efficiency like we saw in the seventies, you know, more or spending on innovations to become more energy efficient, and stuff instituting to some

extent technology for labor as well. Peter, how does this all play into being overweight both equities and cash, which doesn't seem to make sense given the fact that you see bonds as actually being the biggest out of performers here. Yeah, I mean in a short term horizon, we're actually neutral

of ecutors, overweight cash and commodities. On a twelve monthly we are actually overweight equities, And I think it's important to emphasize that relative to bonds, there's still some reasonable return I think to be gotten equities over over a twelve months horizon. First of all, valuations have come down a lot. Actually profits have held up so far, very very well. If you look at most equity markets are

training now below long run average valuations. That's true across Europe and across Asia, and e m not true in the US. The US is still trading above its long run average valuations. But I think there are some attractive valuations that are coming through earning. If you think will grow with stronger nominal GDP, will be able to slower rate. The problem is valuation because obviously with higher inflation, higher interest rates, not seeing the valuation expansion that investors got

used to in the last cycle. So I think taking those things together on a twelve month view, we think there's some good opportunities. Next is now pay the wonderful to catch out and congrats to your Tottenham for top four finish. And now you wanted me to squeeze that in there somewhere. Thank you, buddy Peter of Goldman Sax. Thank you. It is a joy and it was my book of the summer a few years ago. Stevinus and Ackerman way out front and attentions with China looking out

to two thousand thirty four. Now it is vintage tore vin Us and he joins us this morning the album to risk it All, and this is what he does best. This is eight nine ten chapters, nine conflicts, nine chapters on people in the Navy and lessons learned of their successes and their failures. I want to fold this admiral into where we are right now. And this is off my conversation in Davos with Sir Lawrence Freedman as well on the Black Sea. You were first I heard on

the Black Sea. William Halsey was out of Pearl Harbor. He came back, he supported uh nem As, he supported the Navy under a lot of heat, and then he went out to see aggressively. How do we be aggressive in a Black Sea contained by the Bosphors Strait. The Black Sea is a Russian lake right now, their Black Sea Fleet controls it. But here's the good news, Tom, there are NATO allies around that Black Sea, including Turkey, Romania, Bulgaria.

We have NATO warships in the area. The United States can flow warships that are currently stationed in the Mediterranean Sea. I think we need to look to the sea because of grain, because of a grarian products bottled up in Ukraine. At some point, the international community, I believe, is going to have to consider escorting grain tankers in and out of Odessa. Right now they're choked off. That's going to lead to maximal impact in North Africa. We need to

we need to open the seas to Ukraine. I think that's the next big muscle movement in this war. Are we measuring risk correctly? Let's look at Admiral Halsey in your book and the idea that he got a lot of things right and he had a most difficult in the Philippines were worried about failure. Like Admiral Halsey faced failure. Are we over emphasizing failure? I think we are not. And let's take it to Ukraine where you see two

risk takers, right. You see Vladimir Putin who has really rolled the dice in a very big way, and I don't think it's going to come out well for him because he has no moral grounding. On the other side of the coin. To your question, Tom, you see someone like Zelensky who literally is risking at all his family, his parents, his civilization, his cities. That's pretty motivating. And I think at the end of the day, with the tools the Western providing him, his risk calculus is going

to be the correct one. Okay, So, Admiral if Vladiman Putin is an example of failed leadership, why aren't they losing more quickly? Well, they are losing very quickly, as followers, Lee say. You'll recall three months ago, every prediction was that they were going to sweep across the country, conquered Kiev, decapitate the Zelensky regime. None of that happened. Plan A

total failure. So now they're back to Plan B, which is a much more modest approach in the southeast of the country, and they're doing better by comparison with their failures at the beginning. But I wouldn't categorize what I'm seeing right now is a lot of success on the Russian side. So then it brings us back to the Black Sea and your idea of possibly escorting grain ships from Odessa. How aggressive should the Western allies get in

the face of dramatically weakened leadership by Vladimir Putin? Is it time to be more aggressive or is it just to continue this sort of grinding it out kind of approach that we've been seeing for the past couple of months. The mistake here is to think that it's some kind of on and off switch that either we go to war with Russia or we just sit back and let

him conquer Ukraine. I think the West has correctly treated it like a re estate, like the dimmer in your dining room, and is cranking it up, taking more risk. Back to the tough conversation I just had Tom taking more risk, Uh, imprudent ways. And I think in that case, when I look at the grain ship and it's time to take can look at that as de venus. What can anyone from England learn from the power of no?

And John Paul Jones this is a few years ago and Mr Jones went over to England and took on Britain. What do we learn about the power of no in one word? Determination? And here you have a relatively rag tag American navy in the seventeen seventies, and John Paul Jones inspires it by fighting from the deck of the bon Am Richard and defeating a British ship, the Therapists seventy nine. It's an extraordinary story in which he utters

the immortal words immortal to the navy. And I would argue to anybody, I have not yet begun to fight, even when looking defeat from the eye. Oh Pharaos says that once a week, taking this tongue, as you said, have that conversation, and well, thank you, James. De free to stay at the car Group, thank you very much.

Right now and hugely anticipated. Leland Miller is co founder of the Chief Executive Officer of China Beijing book but far more he is someone with his pulse on the Chinese data of the dynamics is taken from the micro data of of China. He joins us. This morning, I want to talk Leland about the Shanghai calculus about the rate of change, the second derivative, the rate of change of the rate of change that the government in Beijing needs from Shanghai. How desperate is Beijing for Shanghai to

get it going? Well, they're they're very desperate, first of all because Shanghai is a growth engine, but second because it's a confidence engine for the economy. And what's what's so curious about you know, the p m I data that came out last night, a few days after an extraordinarily panicky meeting. You know something we haven't seen in decades. Uh, all of a sudden that the data come out last night and they're they're they're they're improving from May. Uh.

You know April was bad, beys getting better. That's the opposite of what we saw in China Beige book data. We actually saw much more problems in May as the as the secondary consequences of the lockdown spread away from Shanghai. So you know, they want to tell a pretty story right now. It's important for markets. But you know, we did not see an improvement from April to May. We

saw the opposite. So Leland give us a sense of what the China Beige Book is charting out the end of the year in terms of GDP, the real GDP of China, not necessarily the four and a half five

percent that the Communist Party would like to say. Well, look, if you assume the second quarter is in contraction no matter what they do or give, give or give or take a little bit um, then you know, the question is what are they going to do the second half of the year without rolling back COVID lockdowns or COVID zero lockdowns if if they need them, you know, to to to get the g DP somewhere in a range

that that they can claim. I think that the new calculus is we're gonna get to the fourth quarter, We're gonna hope there's no COVID, and we're gonna announce you know, five or s GDP for the fourth quarter and try to get it somewhere between you know, three and four percent claiming claiming three and four percent for the year. Then then I think markets will say Okay, that's that's not too bad. You know, we are not on track

for anywhere near that. You have to have a lot of more support for the economy and a lot less COVID lockdowns of the economy in order for us to get anywhere near that ballpark amount. But I think that's the story they want to tell. What are we on the bulk park for? What are we on track four based in the China beage book data? Well, I mean, you know, with with the second quarters week as it is, and and you know, if you try to do any

type of linear projection, you're you're under two. Um, you know, you're you're you have to see a lot more support for the economy, which I do think we'll do. You know, as we get close to the Party Congress, we do expect there to be more credit support. We do expect there to be a little more infrastructure. That's not surprising. But you know you're gonna have to see a lot more of that, and it can't be interrupted by lockdowns across the economy. Leland Miller Deng years ago to get

which is glorious. How far are we removed from that in this Chinese crisis? I don't think we're that far away from it. If anything, some of what we've been taught over the past, you know, six months, is that is that the Chinese model is not actually any more superior than any other model. They just had COVID at a different time, and now they're getting hit pretty hard with it. So everything has to get through the party Congress.

She has to have his political moment, and then then they can start recalibrating the economy and the stock market and the and the regulatory system. Do we underestimate the unchanged China that Deng said to get rich is glorious and that's what they want to do. And do we overestimate right now the totalitarian shift? I think we did until a few weeks ago. But I think, what what's seeing all this uh, you know, headline conflict between Shi

Jinping and the ostensible number two Lee Kutch Young? You know, I think people are understanding how much opposition there is within China in the leadership, amongst people who are lockdown to this COVID zero lockdown policy and to this slowing economy. And so we are now seeing, we are seeing the

dirty side of of of China's governance. Right now, and I think people are more aware of it Leland, A lot of people have been looking out and wondering what we're going to see with respect to US businesses, multinational businesses and supply chains. Why we haven't seen more of some sort of removal from certain facilities in China elsewhere? Are we now starting to see that after years of speculation?

I think so? And for one reason. You know, the trade war didn't do it, COVID didn't do it, but the lockdowns or something else, and I think you're gonna have a very hard time not just getting Western businesses run across China, but getting ex pats or anyone to work at these businesses. Nobody wants to be in China right now. No one wants to be locked down and they can't see their families who maybe elsewhere, for for for a year, for for six months, for for longer

than that. So I think this is shift to the calculus. For people who want to live in China. It's been a much more difficult and they're gonna have a much harder time running businesses in China because of it. US executives are not going to come out and say that they're getting out of China right, because they're not going to say that until they already have. They don't want to hamper their employees who work there. They also don't want to get some blowback from the Chinese government. How

much have you seen this withdrawal? I mean, this is basically the big question for a lot of companies that have been pretty quiet on this. Well, I think it's it's tell tale that you know, just about just about everybody I know is is either out on their way out or or or has already left. And uh and and there's very few people with plans to go into China anytime soon. I mean, it's just very difficult to

travel and it's very difficult to live live. So people don't want to accept that link that change to the Party Congress. Then later this autumn. Well, I think what the Party Congress does is she has his moment, and then after that they can recalibrate certain things. If they needed aange COVID zero, they can change COVID zero if they need to. I don't mean to interrupt, but can they even spare the time to get to December January of next year? You know, I don't see how they

do it. Um, you know, they have to be extraordinarily lucky, and they have to introduce vaccines and even even by the Chinese reckoning that they say they're not going to be introducing them to October. So they're having some very very difficult conversations. Now this is this is far and away the worst conditions that we've seen in years, and

there's no way out if COVID returns. So, uh, you have to be crossing your fingers if you're if you're thinking China is going to really improve in the second half, you are crossing your fingers both the policy support will be there and also that COVID won't just come and and knock them off their feet again. Unless the story with this sign can on the economy. I wanted to

finish on something really important. I think, as we've both observed for the last ten years, it was clear and obvious to a lot of people the trajectory of some of the policy out of restroom where this might end up. There's some people who have turned around in the last few months and have acted surprise surprise that this has actually happened. Any others aren't surprised at all. Do you foresee the same thing happening further down the road with China,

there are allegations of human rights abuses, genocide. Those allegations have come from a range of countries. The U s UK, Canada, and the Netherlands have all accused this country of committing genocide.

There was the latest bunch of files last week obtained by a series of media groups, reporters, journalists, Leland speaking to some of the detail around those human rights abuses, and yet Leland, it's largely absent from the conversation of corporations engaging with the Chinese Communist Party in the economy there. It kind of sets us up for me. And in a similar story to Russia, they ignore it, they ignore it, they ignore it, and then we get further down the

line and they can't ignore it anymore. Where do you see this going, Well, they're ignoring in public conversations, but they're talking about it in private. And I think what most of these companies are up to right now is trying to understand whether they're going to have to completely separate their China business, their domestic China business, from their

business from the rest of the world. And I think that the more that there is if political imperative to have one set of views on the Western side and find certain things unacceptable, and another view that that's that reflects the Chinese Communist parties views in the mainland. A lot of these corporations they may not pull out of China, but what they may do is separate their China business from the rest of the world business. And and and

we're talking about separated supply chains, separated corporate entities. This is a big, big change. Folks don't want to be talking about it, but they're absolutely planning for Really, why would that leave the company, like Sayample, where would it

leave them? Well, Apple, I, you know, I would have to produce what it produces for Chinese consumers inside the country, and then it's gonna have to find a lot of extra production capacity in Southeast Asia and Mexico and other places to produce all these you know, iPhones and imax and other things for the rest of the world. Said, what they're not going to be able to do is rely on Chinese production capacity for most of their production

going forward. And they're absolutely trying to work out continuency plans. But it's harder for Apple and just about any other kind in the world, so they've got enormous headwinds, specifically in the next couple of years. Lead. I'm really interesting to get your thoughts in nice questions. Thank you, sir lit a middle of the at the China bash Book. It's a national a good time to speak to Ellen Wald or her book. Saudi and is just absolutely extraordinary

senior fellow at the Atlantic Council. Ellen, whether it's Christian Melek and his team at JP Morgan or Peter Siro, we just talked to. Everyone is screaming about investment in oil, and it can be at any part of the oil process.

To the Saudis want to lead OPEC plus to a greater investment in oil, I I would say absolutely, And this is something that um, I mean Nasa, who's the CEO of a Ramco, has actually been talking about for for years now, although much more loudly, Uh, particularly since the RAMCO I p O is that investment in oil and in all parts of the oil chain has been so low for so long that even without this Russian crisis, you could say oil prices would be higher simply because

of this lack of investment. And we'll not necessarily seeing a big enough response in terms of investment, except from the countries that have continued to invest in oil, like the UAE and Saudi Arabia. How do we jump start the investment in hydrocarbons. It's you know, I think it starts with uh an acknowledgement that we still need oil.

We may not want to need oil, we may wish we didn't need oil, but if we want to continue with the way that we live, with our modern lifestyle, with driving cars and using airplanes and shipping things across the world, we need hydrocarbons. And yes, there are cleaner ways to produce hydrocarbons, and they are not so clean

ways to produce them, but we still need them. And that needs to be acknowledge at every level, especially by governments, because when government support isn't, their investors and investment bodies take their cues from there, and they don't want to invest in something that they think the government is going to uh put extra taxes on or make impossible to

use in just a few years. Well and Ellen. And there's also a reluctance by investors to put their money into companies that are viewed as bad are viewed as contributing to global warming have we seen capitulation on that front as we see strategists after strategists say commodities are their favorite place to be exactly. And I think that we're definitely seeing some people and some uh, some investors say, you know, so what, it doesn't matter. I don't care

about the backlash, I don't care about public opinion. I'm going to put my money in this area that I think is going to make make money because at the at the end of the day, that's really what they're looking for, is a return on investment. Yes, they want to do good for the world, but that's really secondary

to making money. And but you're still going to have some people and some investment places that are more concerned about public opinion or they believe that public opinion is so strong that governments will continue to make these investments too difficult and that will cut into the return on investment. And until we see a real um, and in particular especially in the United States, we need consistency and regulation.

We need to know what's going to happen five, ten, fifty, twenty years down the line, not just oh well, everything could be changed with a new administration in four years. Hell and I'm going to ask you the same thing that we talked about with Christian may Leg last week, which is why aren't oil prices even higher given some of the shortfalls in production? Yeah, exactly. I mean it's

we're seeing we're seeing higher oil prices. I think that the market is still pretty um, pretty volatile, and we're also concerned bit about demand destruction. At this point, we're seeing some pullback in consumption in the United States. There's definitely concerned about China. Yes, we're hearing news that some of these lockdowns are being eased, and that's definitely going to um impact demand, uh cause demand to go up.

But as inflation gets higher and higher, uh, you know, it's really going to cut into people's use of hydrocarbons of fuel, especially because these are are things that are so high priced. Now within this conversation sort of the out of body experience for me, is it whether it's x On or Ramco, or you know, an independent driller in Oklahoma or Texas, they're not waiting for the government to help them with investment. Why aren't they investing at

a hundred and thirty dollars a barrel. That's a really, really great question. And they're actually a bunch of reasons UM, and some of them are actually really well poculated by the survey that the Dallas said, does of UM you know of of oil producers in the US. A lot of it has to do with costs UM. The costs of of UM drilling now have gone up in a huge way. There are they're not able to get a lot of the materials that they need, so their delays

in terms of supply chain issues. And also they are been pressured so much to give this return on investment to their investors that they're really hesitant to take those profits and put them back into drilling, especially when costs are so high. They also can't get labor their their labor shortages. Even if they pay more money, they still can't get people uh to come and work. So there are a lot of issues here. I think that some of these will work themselves out, but it's going to

take months. And thank you as always be brilliant and well of the Atlantic Council. Ramping up production is not that simple. 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