This is the Bloomberg Surveillance Podcast. I'm Tom Keane, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best an economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts, and always on Bloomberg dot Com, the Bloomberg Terminal, and the Bloomberg Business App. Stephen Rashuder, the US Chief Economists, what's the common ground I'm talking
about common ground of four central bankers right now? What's the common ground of the brilliant Rashoodo constem research at MISSOUI. What do you both agree on?
Well, I mean, I think the answer is very very simple. Is that you know, there is a dynamic trade off going on between the global political forces and the global deflation or disinflationary forces versus the cyclical local inflationary forces at several of the Indie visual countries are experiencing. And it's this battle that's being reflected in the Yeeld curve.
You know, the reason why long term rates can't mount a sustained upward movement is everyone looks at it and says, Okay, eventually, the FED is going to be successful at holding down inflation, So how far do we need to push By the same token, there's global deflationary forces out there that's pulling down long term rates. At the front end of the curve. It's all about domestic cyclical inflation stories, and that's pushing the curve. So the curve is in this inverted standpoint.
It's been here for over a year, and people keep on expecting the curve to shift back to a more normal position, and the reality is it's probably just not going to happen.
I'm talking on camera with smart people, like I say, I'm posing the Peterson Institute. I'm talking off camera with all the officials that don't want to talk to me on camera. Are they working out of the textbooks you used in school or are they making it up at Jackson Hall internationally.
Well, they should be working out of the textbooks. They should be actually going back to the older textbooks, the Canesy and textbooks. Because the reality is, we learned from COVID that Knesy and Economics was the right brand of economics, and we've gotten the response we expected from a Cainsy and stimulus, and therefore a lot of the neuvel discussion
is kind of should be put to the wayside. In fact, one of the things that worries the most that I hear from the Federal Reserve officials is this idea of as inflation comes down, real rates go up, and therefore the tightening gets greater. The reality is, corporate CEOs do not make decisions on after the fact, real interest rates. They make decisions based on what they expect nominal interest rates to be, and that nominal interest rate assumes an
assumption for real returns and an inflation expectation. And if those nominal interest rates are rising, that's a bigger problem than them looking back and saying, oh, well, real rates will hire.
All right, let's put this all together and raise a question about the soft landing narrative that seems to now be the consensus on Wall straight. It seems as though this has become a commonplace idea, even though it's been elusive historically. I see you laughing. Are you seeing material cracks that challenge the idea of this that people are ignoring?
No, I don't see the material right now, but I think the reality you have to understand is that any recessionary tendency will wind up being a hard landing. You know, there are differences between crashes, credit crunches, and there are differences between recessions. And this is going to have to be an inflation recession and that's the result, and that's
not necessarily a soft landing. A soft landing is this vague constant when you bring the economy back to trained growth and inflation comes back in that direction as well. That's not going to happen with a labor market as tied as we have today, and it's going to be hard to get inflation to go from four percent to two percent, a lot harder than it was to go from nine to four.
So we're talking this morning about foot Locker, about Dick's boarding goods, about some of the results and retailers that have struggled in the past and that are now seeing that kind of come to a four. And we're raising a question, is this idiosyncratic stories of management structures and business models that have become less relevant or is this something broader about consumer spending? From your view, not to go into the company themselves, but what do you think it is.
No, there's a lot of videosyncratic risk. I mean, keep in mind how long the expansion was prior to the COVID meltdown, and then the nature of the COVID restructuring and the rebalancing or the reacceleration really is papered over a lot of problems for a very long period of time, and they all have to come home to roost. And this is the idea that a recession is somewhat therapeutic if it's not a credit crunch, and we kind of need that in this environment.
You are acclaimed and I'm gonna go to Olivia Blanchard's study of our start and where we are in the one phrase, it permeates. And this is the humility of Blanchard's work is other factors. He says, there's things out there we don't know. You own the high ground on this. What are the other factors? Make this our starred certitude a mystery?
The real issue is when you look at balance sheets, which we don't do a lot of. We don't look at balance sheets and try to assess where we are. We look at things like financial stress measures, which, to be honest with you, we play games with because there's just tistically created out of indices that we see published in markets. The reality is when you get to look at the underlying balance sheets of companies and you look at them at a macro level, balance sheets are extraordinarily healthy.
And this is why when you look at Silicon Valley and so far, you could actually back away from that having bit of credit crunch because the underlying balance sheet of the banking industry is very healthy.
Just to scrippulse all together. What is an inflationary recession? What is an inflation recession?
Well, the difference between an inflation recession is a credit recession is basically, the interest rate increases in the inversion of the curve slow the economy to bring down inflation in a credit crunch. What happens is the inverted curve causes a credit crunch that then causes a recession. So
the Federal Reserve has to slow the economy. You can't get the economy to slow and get inflation to come down to target unless you're going to create an access in the labor market or some access in the labor market. That's what they have to accomplish. You can only do
that by having GDP contract. That's a recession. The reality from a credit crunch standpoint, is the credit crunch causes the recession, and that's what nineteen ninety was, that was what two thousand was, that was two thousand and seven was. And the reality is that's what COVID was, because COVID was a massive corporate balance sheet problem and household balance sheet problem, and that's why they required subsidy levels of interest rate.
The sever short of thank you so much with Missoul Lizzayne Saunders right now to save the show Chief Investment Stratus to Charles Schwab, this is an important conversation given the gloom out there. What's the Saunder's gloom measurement right now, liz In how gloomy is it in the land of equities?
So we really started to face problems at the beginning of June. Lots of conversation, obviously about the concentration problem, the Magnificent seven dominating pretty much all performance. At the same time, he only had fifteen percent of the S and P constituents outperforming the index over the prior sixty days, So it was sort of this double whammy of concentration
which often happens and cap waited indexes, but such significant underperformance. Initially, we started to see some breath improvement at the beginning of the pullback that we saw up the cap spectrum into those megacap names. Now, unfortunately, we've seen this deterioration in breadth and it's sort of across the board, and I think more has to be worked out there. Even on a day like yesterday, under the surface, it didn't look great. And these pullbacks tend to have three steps,
you know. The first step is you start the down moving a little bit of a relief rally, and then you continue. I don't know if it's going to be in correction territory, but I think there's probably a bit more that has to to come out.
You right right where I want to go to review, folks. From twenty twenty one, the peak of the markets SPX is down nine percent, eight percent whatever, and late the recent pullback has just been a crater down four percent. Listen, and you got to be kidding me. You and I remember when a correction was a correction? Is the mathematics of correction? Bear market or dare I say, down thirty five percent? Still in play? Are we in a new world?
Well, so we've gone now almost six hundred days without hitting a new cycle high. That's a pretty extended period of time, and that suggests that this is more likely a rally, you know, in a in a bear market. But we've all been surprised so many times with the unique nature of this cycle, and we still have the dip buyers that come in. And what's interesting is those mini phases that happen of the dip buyers stepping in. It's also when you see a lot of attention go
down the quality spectrum. You know, you get lips in the meme stocks and the nonprofitable areas. That's the segment of the market that I think you wanted to use trade or lingu fade. I think you want to continue to lean into called the quality trade and just be mindful of fomo down the quality spectrum, especially in nonprofitable areas.
One area that has seen a large amount of interest, especially in light of this question around where we are in the cycle as being consumer discretionary, and I'm wondering if you think people have gotten over their skis and the optimism that the savings won't run out for individuals, and I'm among those people that question, maybe it's never
going to run out. But then the Macy's CEO got on the call and said that credit card delinquency is taking up pretty significantly and really seeing consumers much more restrained with how much they're spending. Do you buy that story? Do you think that's going to come to the fore more?
I do?
And if you have to peel a layer to back from the onion when looking at things like broader retail sales or even individual retailers reports, to look at unit sales, the biases in terms of consumers moving more toward you know, generic type brands as opposed to higher end brands. We also have to be really mindful of differentiating between nominal data, and a lot of retail data is expressed in nominal terms and in real terms. And you're right, I think
pointing out delinquency is important. It's mostly been concentrated down in the higher risk segments, lower income, subprime, but you're starting to creep into more of the quality segments on the delinquency side. I still think though, that it's the labor market that is most important to ongoing consumption remaining somewhat healthy, even more so probably than the saving story,
the excess savings. I think it's the labor market. If we start to see more cracks in the labor market, I think the consumer could maybe shut down the spigots fairly quickly.
Liz, And what kind of cracks do we see now in the labor market.
Yeah, ours works have come down quite a bit in this environment where there might still be labor hoarding. You're certainly seeing that. You've seen weakness in temporary employment, multiple job holders having gone up. You've had some bouts of an in unemployment claims. We've seen some of the commentary from some of the recruiting companies that are withdrawing guidance. So I think you're going to start to see it
on the job openings, layoff announcement side of things. So they're still cracks, but they're wider than they were a few months ago.
It just happened him really really slowly. Isn't it just much slower than we thought it would? Listen, thank you for the update as Alwise, listener sunders at Shashchuap.
What is important here at the surveillance is we like to focus for thirty minutes on a theme. Damien Sassawur scheduled to darken the door on em and the market dynamics and far more. John is to speak to someone including the frontier economy Europe, and that would be doctor Weisman. All of his work at bear Stearns and now.
At Macquarie, Harry got to say you fantastic has always to change over in Europey. We thought this year would be good, driven by China reopening. How important do you think the global slowdown is going to be in Jackson holl this Friday?
Not too important because I think that the theme of the symposium or the conference, if you will, is not the short term. It's not the cyclical themes. The theme they've laid out is the structural changes in the global economy. And when you hear something like that, you think that the speakers are going to be directed towards talking about things that happen a year from now, two years from now, three years from now. As far as Powell's speech goes, look, the FED could if it wanted to pat itself on
the back. Inflation is low in the US, the economy looks a bit robust at in certain quarters. But I don't think it's time for him to do that. There are still too many hawks on the FOROMC panel that are nudging him towards at least sounding as if he should be hawkish from a medium term and long term perspective.
When you think about those narratives about the global economy that are structural and longer term in perspective, they are things like climate change, deglobalization, demographic change, high debt in the emerging markets. Those are all things that sound inflationary. At least two of them feel like negative supply shocks. So I don't think he'll be inclined to say much about the short term and the outlook for the FED
funds rate. I think he will focus, if he sticks to the narrative of the symposium, on those longer term considerations, and that will mean that he's going to stress that it's going to be difficult to get to that last mile of inflation decline from three percent to two percent, and therefore don't expect rates to be cut.
I look at Europe and what we're going to hear from Powell and from the Guard and other worthies are going to be there is well. And I look at our start as a debate here. It's an academic debate of a full and running economy in Europe, whether it's Eurosclerosis or something new. Can there be a European our start. Can you do legit economic analysis of the European experiment?
You can, and I think you can do a legitimate analysis of the current cycle in Europe. This weakness that we're seeing both in manufacturing and now in the services, I think to a large extent, the manufacturing slowed down in Europe is coincident with the Chinese manufacturing slowed down. I don't think you can separate the two. Look China had this massive slow down in manufacturing in the second quarter, Well look at that. Europe had a massive slow down
in manufacturing in the second quarter too. We know those economies are connected through the German industrial complex and the export economy in Europe, so I don't think that's too much of a mystery. China and Europe are coincident. I do think, however, that this service is slowed down we're seeing is also analyzable. But I think the focus has been too much on what the ECB has done with rates. It hasn't been enough on what the ECP has done
with liquidity that it issues to the banks. The Teltrope program has been winding down out of the ECB for a few months now, and if you look at credit creation coming out of Europe, the extent to which banks have issued credit to the private economy, it has flatlined. And that's the reason why Europe is now seeing this slump in service.
Just to underscore this, in other words, the slow down in services is directly related to the transmission mechanism of ECB policy, not necessarily what's going on with China. Correct, is that basically what you're saying.
That's right, But what I'm also saying is don't look at rates. Don't look at the deposit rate being at three and three quarters percent. That doesn't really tell you much about what's going to happen to the European economy. Look at bank credit, look at broader monetary agrates. They have flatlined, and nominal terms they're actually down year on year.
In real terms, it's the credit economy that people don't focus enough on, And if they had been focusing on that flatlining, they would have predicted to slow down an agurd demand in Europe.
Is the European economy so different from the US economy in terms of the rate structure and the lending structure, that there is no analog to be drawn in terms of how higher rates in Europe are affecting the economy and how they will eventually trickle out in the US economy and affect the economy there.
They should affect the US economy the same way. But there is an important difference between the Europepean economy and the US economy. And that's as follows. The European economy is overly dependent on its banking system for the extension of credit. They really don't have non bank lenders, they don't really have direct lending. In Europe, everyone who wants a loan ultimately has to find his way to his or her way to a bank. In the US, it's completely different.
Now.
If you were just to analyze the banking systems in Europe versus the US, you'd find a lot of similarities right now. You'd find that credit is contracting. You'd find that loan officers in the US just says in Europe are much less willing to extend loans. Maybe the reasons are mildly different. Maybe in the US has to do it regulatory overhanging. Maybe in Europe it has to do with what the ECP has done. That's the similarity. The difference though, is that the US doesn't have to depend just on
its banks. There are other sources of lending to support the startup economy, the legacy economy. We don't have that in Europe, and therefore when banking bank credit contracts in Europe, you feel the effect on agurate demand much more than you do in the US. And I think that's what we're seeing now. The US will catch up.
Though there is a time for a surveillance audible. We will do it right now. It's your weisman as well. Years ago you would publish with m David Malpas and the rest of the Klan it bears Stearns on Latin America, and the world would stop. Argentina. Do we care or is it just the problem child of our lifetimes?
I don't care. I think it's the problem child if our lifetimes. You know, it's not that well integrated into the global economy. Yes it has, it has some commodity exports. But I lose the hysteria, Yeah, lose the hysteria on Argentina. It's not terrible by the way that they may have a present that's going to adopt some radical market policies. In the final analysis, when you have a situation like this that hasn't been working for you know, more than
more than four decades, why why be scared of something new? Exactly? I would be much more scared of something old, you know.
So okay, So what should the IMF too? They've been handing them out gazillions gazillion. They're right, they're going to write a chuck of Morocco.
I assume, I am after Just wait, you cannot make a decision with regard to the extension of credit until you see what the political economy is. Let let things let things simmer for a while in Argentina, Let's see what the policy agenda would be under a new president or a legacy administration, and then make a decision.
Terry, thank you, it's going to say Terry Weisman at Macquarie on the Club of Economy.
Creig Value joins as chiefs Policy Strategist AGF. Greg I'm going to cut to the chase. The stereotype is a polarity of the nation and maybe even the polarity of the party. Let's cut to the Wisconsin chase. Wisconsin was won by Biden, by under one percentage point zero point sixty three percent. Trump won it four years earlier by zero point seven seven percent. How does this debate fold into those x number, those ten key states that make the difference in November of next year.
Well, this is the opening night. Obviously, I'll get my espresho machine out. It's going to be a late night. I think it's time for some new faces. And I think maybe one of the stories tomorrow morning will be the emergence of Tim Scott, the African American Senator from South Carolina. Maybe this guy Ramaswami. There's a couple of other people who might do well. It's the beginnings of a sign that the country will look at fresh faces.
Where is the debris of George Bush Senior? Somebody who worked in office for decades and decades Centrist Republican? Is that Chris Christy? Or am I confused?
Well, Chris Christy is a Centrist, but he's also very pugnacious. He can brawl, and I think he will be the hit man to go after Donald Trump. I don't blame Trump for not showing up. I mean, he's ahead by forty points in a lot of states, so he'd have nothing to gain and everything to lose by showing up, but he will be a subject. I would focus Tom on other issues that will be interesting tonight. Aid to Ukraine, what do we do about the budget deficit? There are issues where the party divide.
And that's one reason why people actually want to hear the issues which have gotten drowned out by some of the larger concepts that you want to dig into that. But before we do, you said you want to see fresh faces and a lot of people are looking for that at a time or run to Santis is having to prove himself in a new way. What does he have to do to reclaim his spot is number two and get some growth in his campaign?
Promise well no ghafs Lisa. I think he can't afford another misstep. But to a certain extent he has an advantage and that his expectations are low. I think people aren't expecting him to show much, so we might exceed those low expectations.
I when you talk about some of the divisive issues you mentioned ad to Ukraine, where is sort of the popular feeling within the Republican Party is their consensus that some of these candidates are going to try to reflect and is it different from the more general population consensus.
Good, good question. I think for the base and the party and some of these candidates, the feeling is we spent enough on Ukraine for a war that hasn't been won. I think there's also a real division on social security and how you deal with a budget deficit. Chris Christie has been very outspoken saying we need social security reform. Dessantas said that a few years ago, will you embrace that tonight that I'm not so sure of.
Greg very international audience, and frankly I'm not up to speed on this as well. What's the primary process look like? Is it radically different than what we grew up with? Is there something new this year as we staggered through February?
No, I don't think so. I mean, the signing deadlines come late fall, by Thanksgiving. A lot of states will have their deadlines, which will focus, I think on the governor of Virginia. I think there's a chance to Glenn Youngkin late in the sign up period will decide, you know, if it's just Trump and nobody else looking strong. You know, Glenn Younkin's worth about half a billion, and I wouldn't put it out of the question him running at the last minute.
Who else has money? I mean, obviously President Trump, even with illegal challenges, has money. Mister Pence, I believe is struggling. Which of the candidates tonight on the on the stage has money?
Not a lot of them have. Glenn Younkin money. Earlier in the year, Desantas raised a decent amount of money, but the surprise fundraiser in the last few months has been Tim Scott. And again I think Tim Scott is going to be the surprise of the night.
Greag five. Thank you, gret As.
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