Surveillance: Soft Recession with Ruskin

vice chair and chairman Allan Blinder years ago. How do central banks talk? How do they talk with this dot plot? Well, I think they try stee other markets to where they

think rates should be. And obviously they've got a little bit of a problem right now because the markets very pacis stant in his thought process that the FED is going to be cutting rates in three I think the intriguing aspect of what you have right now is that, you know, we thought the FED would probably lose control or could lose control of the back end of the curve because back end heels were too high, and you know, QUT would maybe push heels higher, and we've got exactly

the reverse problem um with heels. You know, more consistent with the three percent funds rate than a five percent funds rate. So the mark is not really listening to the Fed. It's not the worst problem the Fed could have, but I think the fair is s thoughts trying to steer the curve higher in terms of heals, Allen, do you see them being successful in doing so? Not at this meeting necessarily. I think, you know, the odds are that the twenty three three dart is between four and

three quarters and five percent um. You know, it looked like it maybe a bit higher than that before cp I, But I think that probably is a reasonable guestimate of where that medium dot will be. Uh, you know, that's not far from where the Fed, of you know, where the market effectively believes the peak will be. Anyway, it's really the discrepancy, I think, is in the rate cuts that follow very soon after the market thinks this is

going to be more of a traditional cycle. You get to the peak, you don't spend very much time there, and you start to see rate cuts and the FED saying no, wait a minute, yeah, there is a different cycle. And obviously the more the back end hills are low, the more you could actually see fed funds plateau for quite some time. Alan, I remember a note that you put out months ago when you look at the previous few rate hiking cycles and calculated the average duration of

staying at peak. We put out a similar story over the weekend last five cycles. I think the average was about eleven months. And what is about the characteristics of this tightening cycle, the economic back draft the influences your thoughts about how long they will stay at peak? Yeah, you know, I think it's all about how much the economy slows, and how much that slowing, particularly in the labor market, leads to a reduction in wage inflation that's

consistent with a two percent inflation rate. You know, I think the supply side is all coming together very nicely. We're actually getting a positive supply side shock developing, and it's really the demand side that needs restraint. And it's not obvious what's going to happen here, because you can imagine a situation where if employment remains pretty resilient and

inflation starting to come down. That mix of employments resilience driving nominal wages and inflation being lower means the real incomes will actually be growing again and demand could be quite resilient. So you know, there's a lot to play for here. The recession, which seemed like a complete gimme h, you know a couple of months ago, is you know, certainly looking at at worst like a know, a very much sort of soft procession as it work. Well, that's

where I wanted to go. Allen. Does yesterday's CPI print give you a greater sense that there could potentially be a soft landing? Does it make that a more plausible scenario to you? I think it does At the margins, I think absolutely. I think you're seeing that the goods disinflation that we all have been anticipating is definitely feeding through. I mean, we we do some nice calculations on the CPI. Of course, we go x energy, X food, X shelter, you know, lose half of CPI and low and behold,

we don't have much inflation. We have disinflation. Um. So maybe that's a bit of an exaggeration, but I think you're getting some constructive signals there that the supply side is without question helpful. I think you're going to see it right now. In fact, the import priced data that's coming out at thirty look at that and you know, look at the x petroleum numbers. They've been down for the last six consecutive months, and that serves as a

strong correlation with pp I finished goods. So I think that side is actually very constructive as far as the soft landing is concerned. As I said, I think you've got to be cautious on the wage inflation side. I think Pal laid this out lot in his last speech when he suggested that, you know, with it effectively excess demand to tune about four million workers. I think that

is deeply problematic to get inflation down quickly. I think what you have right now is not that inflation is coming down, but ultimately can we make that transition from say a three and a half percent core inflation rate to a two percent inflation rate? Just real quick here out. And we were speaking with Sarah House of VOLS Fargo earlier and she said, all things being equal, a reopening of China would be inflationary. We are looking at a

more rapid reopening that many people had expected. Do you see this boosting inflation in a way that it's not currently being accounted for by by current projections? Yeah, I think you know, if the opening is successful and it's a you know, big If you could think in terms of revising up Chinese GDP numbers, you know, our forecasts about four and a half percent, you could think, you know, successful opening could raise that number up to six percent.

Obviously you've seen base metal cyclicals are very depressed, if anything, in over the last six to twelve months. And um, you could see that commodities inflation start to pick up to a degree, but I'm not particularly worried that that's the big driver at this point in time. And again, if you look at the import prices, you can you know see today, Um, you know, the inflation pressures from China are quite muted. The import prices from China of

quite muted, running roughly about two percent. And just to squeeze this in just briefly, at the top of your note that you put out yesterday, you indicated that for the last year, the two year has sold off for every single FED meeting. I wasn't aware of that, Alan, Do you believe today is going to be any different? Um? I think pal is going to triangle in that direction. So you know, at least you've got the fat chair pushing in that direction. Uh, you know is it going

to be successful for more than twenty four hours. Probably not that uh I would say on balance the biases in that direction, slightly higher to your heels. And I'm rescing at Deutsche Bank and a great note again, fantastic. We are honored to bring a Torsten Slack for years of Deutsche Bank and now chief economist and Apollo Management to brief this morning. As we said defined cumulative, let's define faster. That's a lead note. David mel passed now at the World Bank, when he was at bear Stearns

love to use that word as a calculus substitution. What does faster mean as we look at the inflation continuum right now? So of course what's important is, as you just talked about, the interest rates have already gone up and the cumulative effects are beginning to show, most importantly in interest rate sensitive components of GDP. We're seeing a slow down in housing. We're seeing a slow down in autos,

and because those are the sectors that require financing. So at the moment, the good spot of the economy housing, all those durable goods washers, dryers, is slowing down. It's the service sector that the Fed would like to slow down at this point you said that it's too it's too soon to call the all clear, that we're actually on some sort of disinflationary tread. But you also have been talking about how there is this strong year over year comparison effect that is taking effect and that is

going to drive inflation lower. So how should investors look at this? Are we heading into the same era that we left or is this a new more inflationary environment that we're seeing led by services. Well, that's a very very important question, Lisa, because there is a very important debate in FIT working papers and in the academic circles also about how much demand destruction is needed to get

inflation back to two percent. A lot of people highlight and say are they're worried about inflation might be sticking at say three fall five percent, But that is not anchored in any model or any framework other than the fear that more demand instruction is needed. And there's a very wide range of views that. For example, Danny blast Flower is saying, well, we'll be back at two percent inflation in six months, whereas the SEP the summer if your own projection from the FIT is saying no, this

will be more like three years. So the question for markets is not whether inflation is folding. Everyone agrees that inflation is falling. But the question is if you both have know that the supply chains are getting straightened out, and also the economy is slowing down, it was the good sector and the interest rate sensitive components, you could have the combination of inflation coming down potentially faster than what the consensus is saying here at the moment. Un

financial conditions tie into this trajectory. In other words, would tighter financial conditions lead to a faster rate of change or faster rate of inflation coming down and to a lower multiple. Yeah, that's very critical. I mean, it's not clear to me that the fit once financial distance with titan everywhere. That's a very important nuance in this debate

about interest rate sensitive components of GDP slowing. So we're definitely seeing housing all those rouble goods slowing down, and that's of course helpful in both dragging inflation down and in slowing growth down. But the service TX that's not quite slowing down yet. So tightening financial conditions is already happening, in particular on the good side, but on the service side. If think about primary high yield markets essentially shut down at the moment? Is that a desired goal for the Fed?

Do they want that to spread to i G? I mean, that's a very important debate about, well, do they really want to slow down financial markets to the degree that is potentially required? And maybe they want to broaden this out and spread this out over a longer period. When you're George B I could just see Dr Hooper turning to you and saying, Tarsten, would you make up a chart here about when the real yield the real wage flips. So part of the service sector idea here is we

have massive negative real wages. What's the dynamic as we go through this process? Chairman Powell wants us to go. So you mentioned i G as a risk spreading over from housing. Well, can they successfully manage allousy inflation adjusted wage back to some kind of positive wage. Well that's a real challenge because as you know, about full million

workers are missing from the workforce. The labor force participation rates about full million below trend, and that means that the pressure on wages continues to be out there, and with wage inflation at five pc, it is absolutely the case that the labor market does need to deteriorate, meaning to soften a bit more, and that's also what Japal

himself has been asking for. But to your point, there is a very important question also about can we have inflation coming back to two percent without the labor markets often incontentially, So you're talking about the people who are pitted on either sides of that exact debate of where exactly we're heading and where the natural rate of inflation

will end up. Where do you stand? So I do think that from all the FED working papers that have looked at what drove inflation higher, two thirds of the increase in inflation was probably because of supply shocks and supply chains that are now getting straightened out. We'll resolve that on its own time will take care of that, but the one third that's demand is going to be much more challenging. But the question is, with the cumulative rates increases that we've already seen, maybe this could be

enough to actually lower the economy down. So therefore, if you look easy FCCO on your Bloomberg screen and the contentious expects growth and basically zero for the first two quarters of next year, and that does mean that maybe we already have in the pipeline that's lowdown that's required to gradually lift there on the flo rate and therefore, get to your question, leads and the soft landing that I think is the most likely scenario, And other people

are starting to agree with you more than they were perhaps three weeks ago. The Max Kuttter view of the world, the Neil Dotter view of the world is for perhaps not a recession in the first half of next year, perhaps pushing it back to later in the year. This is not a positive outcome though for markets, because it indicates the Fed will have to keep rates at a high level. Do you agree, Well, no, I don't agree because I think remember, if we do not have a

deep recession, then earnings should actually still be okay. So if there's a soft landing, I still think markets could actually do okay. But we are going into the period. The inflection point is very clear. We're going from a period where the FED was saying rates are going up up up to now I fet is saying, well, we can see the peak is in sight, and now we

might begin to see rates going sideways. That means that vall was very, very significant, very high when we were going up and now vall is being compressed, and that should also get more clarity to equity investors and to credit investors both for i g. Higher than the loans. You should begin to see more clarity about well where is the peak and rates. We're getting closer to the point when we will have a better idea about where

we're going in terms of the economic data. So the bottom line where that is that from having a long period of a risk of a hotter landing, I think that the mall we can get the sequencing of inflation coming down without the plan rate going up the mall, we will be moving towards the south landing scenario. Most people talk, including me, you do you play soccer all the time over in Brooklyn. This was a dump of

a shipyard which was a grassroots Brooklyn effort. And then Governor Pataki and a mayor I can't remember his name, but then a mayor jump started this going into a gorgeous soccer field as well. You are qualified here team Denmark and uh Brooklyn. Can Morocco actually get this done today? Are they gonna, you know, be like Croatian? Then we've got France, Argentina, They've clearly been the underdog. They've been very impressive, as Thesa was just mentioning that defense is

very very good. She more than me, so I think, well, friends, of course they like they lose to France, so you think that's funny over there, I do that one. We'll see, we'll see how far they get. But I mean France, of course, Bobby is just outstanding. France Argentina quick it's Argentina. Yeah, well, well I'm going to go with friends. But but Argentina has some really good players. But I still think that France has the opperlex. I mean, they have some really

good players. They've been praying incredible tournament so so, but let's see both both of course are very good. Argentina of course also has with messy and incredible team and they did incredibly well yesterday. Would you like to incredibly creative offense. I've really enjoy his his energy and and has illusions. Mr to uh Pharaoh says to diego Madonna. You know, I think it really works out that that sounded really smart, Tom, that was good. It was really fun.

Any other references there is really good. He really played well. Torson slock, thank you Paul, Liz Young joins his head of investor strategies. So far in our fed hour, it is about the time continuum, which is moving averages, and Liz Young has written about something I can't stand, which is the gloomy death cross. Liz Young, what does the death cross and what does it matter for Chairman Paul Well?

I don't know that it matters so much for Chairman Paul, but it matters for investors, and it's been something that's signaled earlier this year. What happens is when the fifty day moving average goes below the two D day moving average, that's the death cross. And at that point, it's widely believed that the two D day moving average becomes our top point, our resistance level. And if you watch what the SMP five hundred has done this year, we have

not been able to break above those resistance levels. You can draw those in a couple of different ways, but the point is that they have held strong, and they held strong again yesterday we got right up to about forty one and gave a lot of it back. So the market just has not gotten out of that range. So what does that mean? How does that push back against the bulliance that we have felt about disinflation in

the FED moving away from some of the more hawkish proclamations. Well, I think that there is a desire by a lot of investors to number one, just be done with all this negativity and find some durable upside in the market. But when we sit here with three different yield curve in versions that are very meaningful, and many of those are meaningful to the FED. We've got the twos tends inverted, the three month tenure, and now it's called the near

term forward spread inverted. That keeps a lid on equity market. And when you look at just the upside opportunity, it's difficult to get past certain les evaluation and really feel like we deserve to be at that pe. So when you get up where we are now seventeen and a half to seventeen point eight times forward earnings, it's difficult to really say, Okay, we're doing that based on strong earnings momentum or strong fundamentals in the economy. It's just

not the case right now. There's still a lot of headwinds. So, Liz, how do you talk then with investors in terms of how they should look at next year, how they should look at the FED, how they should look at what may or may not be a recession if you take a look at some of the increasing pullback from recessionary types of scenarios. Even Alan Ruskin over at Deutsche Bank saying that yesterday's data pointed more toward a soft landing

than he previously thought. Look, yesterday's data was good. That was that was a positive report in the sense that we surprised to the downside. It's signaled to the market that it's possible we we avert catastrophe. But we're still not done with this. And here's what I want to hear from Jerome Powell today. I expect that they will

do a fifty basis point hike. I'd like to hear how they decided to downshift, because it will give us a signal of exactly what indicators they're watching to choose whether or not they need to slow down or pause, and that will give us a little bit more certainty going into I'd also like to hear, sorry, just real quick, I'd also like to hear what his definition of restrictive is. Does four and a half on the upper round get us to restrict it? Interesting. Is the stock market one

of his indicators, as it was for Chairman Greenspan. I think it's one of the indicators for financial conditions. But what we've heard from them, and I don't expect this to change today or anytime soon, is that they are

laser focused on inflation and the labor market. So I think the more likely narrative shift will be that we stop hearing so much about inflation and we start hearing about the tight labor market, much more interesting, lace brilliant as a wise So I final LEAs, thank you, thank you, and I'm going narrow here when I could go broad, broad broad with Edward s. I'man he is the ever cores I s I founder, far more than that, someone

so esteemed in market economics. He has been discussed as a member of the governor Board of Governors of the FED or vice chairman. And have you've ever been vetted to be chairman of the Fed? Has anyone been that? You know? I can't imagine you demanding the FED members to read your note? Have you ever been vetted? We'll do reading some, but you know, as you know on my fourth I love your show, everything you do, but

my criminal record just gets in a way round. We're not going to crypto right now, and I want to go to one paragraph and this goes back to C. J. Lawrence. Folks in my ute when when Ed was at C. J. Lawrence in venting market economics as we know it today, the world stopped. I believe it was Thursday afternoon for M O, which is Larry Cudler's big number M one, M two, M three, M eight and the rest of it.

You have ad him in a chart which speaks volumes of United States inflation adjusted M two and the only word that works in the modern lexicon is cratered. What do we make of the plunge in M two off the pandemic spike? That's dangerous? Uh, time you hit the thing I'm most focused on right now. I just had Greg you go in uh for our morning meeting, and he's somewhat dismissive of this, and the fete is totally dismissive.

But I've I grew up in this period in his seventies, UH, when Russell Freeland was rock star, and so I think it's very serious. But we have an analyst here, Glenn Shore does the banks number one analysts in space. And he's been telling me this for six months that bank deposits are going to decline three this year and as a Friday down one per cent. Uh. And bank deposits are five percent and two So you can get your MP too reading uh now from that source on Friday afternoon.

And now bank deposits are down a little over one percent already. Uh. And that means my supplies probably contracting hasn't contracted since. So let's say to you, you follow everything, You're amazing, but let's say the odds that it makes a difference or eighty or sixty. It's a very serious issue. Uh, we'll see how it works. Is slowing And how do you feel about the age old effect of liquidity? We have four out of five guests telling us the liquidity

fears are overrated. But Mr Diamond is going to look at this deposit base and do I suggest ad that we have a caution in the winds for two thousand twenty three because of a dampening at least if not ill liquidity. Yeah. So, Uh, you're also a historian and John Maynard Kane wrote a paper uh that found the my supply leads to GDP by six sixteen months. Think of that, and that's about what you know, the long

and variable lags would suggest. But uh, the point here a little bit, it's not I don't have all my eggs in one basket. So as of this afternoon, the San Francisco uh FET fundra adjusted for QT what is it called a proxy f fundrate will be six and a half percent, and the core PC is uh I think four seventy or five, and so the F fundred adjusted for quantitated tightening will be well over the inflation rate, which is what the fifth says they want. Well, I'm

saying they got it. And the bonnil is three fifty. So you have a massive point inversion of the Yolk curve. And and you know, you know, we've we've got these recession calls out there, and I guess folks are just trying to parse out how deep, how severe, how long the duration. But the consumer is just incredibly resilient here and the you know, the labor market is robust, and we've and it seems like inflation is peaked. How does that all add up in your models for a recession?

In so my my basic case for years now has been to look at our company surveys, which go from trucking to retailing, home building. And then look at the p M I s. The PM surveys have dropped a lot, they're still pretty high. Uh and the p m I s are below fifty, I think. And then I look at labor market indicators like unemployment claims, and they've now moved up. And we do a tally of layoff announcements. Uh two months ago there were eight hundred a week

and now the ten thousand a week. Uh So, you know, it's none of this is really ringing alarm bells at the moment or not, most of us not. Uh So it's really a question of whether or not these things I mentioned earlier are leading indicators or not. And that's my job. So I think they probably do. But I

think the consummlers in in great shape and times. You know, we our oldest survey we do is of retailers and it was like seventy five or something, and that was I mean, your real job, Your real job is to contain Julian Emmanuel, which is I don't want to get into dad, Julian told me the other day, and more fans over here. Julian told me the other day that he needs to see Catharsis. You're the adult on this.

Must we have a Catharsis a vix of thirty five or forty in the Emmanuel language, or however you want to put it. But do we need a market Catharsis to move forward to a better future? Yeah, So let me explain my position. Uh. I have a I worry about the economy a lot, as you can imagine. Uh. I also think it's possible we don't have a recession if inflation slows rapidly. But you know that's starting to happen,

but not enough yet. Then I have Julian and and and he he thinks this is a pretty dark picture because he listens to what I'm covering. Uh. And then I have Rich Ross, who does technical like this guy is like it unabashedly bullish. Uh. You know the market then the Catharsis, but has the size of the market bottom. So I'm a little bit not a good guest for you that strong opinion. Uh. So I don't have a strong opinion. I'm a little bit more bullish than bearish

because inflation is slowing. As then one of my maybe my main uh view it looks as though he saw yesterday. When it slows market, it is happy because it makes it fit. Well. Maybe have to maybe have to do with list well, and we're gonna have to go here. I do. I do want to mention folks because I'm gonna get five emails send me Ed's note. We protect the copyright of all of our guests. That's been a surveillance, uh lodestone from today one. He has Edward S. Hyman of his I s I ever cor I s I N.

We introduce him differently than we ever have before. He's Terry Haynes. He talks to us about Washington. He has a wonderful and different prison year. But also he is a grizzled veteran of all the chit chat the media is doing right now. In the vicinity of two thousand two, Mr Haynes provided general council services to House Financial Committee

under Mr Oxley. I believe it was on scandal. The extinguished veteran Terry Haynes joins us this morning, Terry, is this different than what you witnessed in the early part long ago of this century. Well, it's not. What's different

about it is Tom Frankly, as the market impact. I think what people forget about the Enron and world Com scandals and what made necessary the Starbanes Oxley Act is that markets started to view it as an as an attack on the the the ability of markets to understand, uh, you know the books of the books, the solvency of the prospects of publicly traded companies. They figured, you know, if Enron went down and then world Com had did this very simple fraud, Uh, you know what's next, right,

it was really destroying wealth and value. We don't have that situation today, so it's much different than that regarding you know, John and Lisa want to jump in here, but Terry, I'm gonna cut to the chase. The what next is called binance? How should Mr Gensler? How should c f TC? How should the politicians you advised years ago? Now what they should they do on the what next of binance? Well, Congress, let me take Congress first, and

then the regulators. Congress you know, created the regulators oversees them all the rest. So you know, my my view here as Congress. You know, it's kind at the top of the food chain. The you know, Commresce doesn't know much about crypto doesn't know much about finance, But what I got from the hearing yesterday is Congress thinks this stuff as a scam, and even people that think there's promise in it, they think that the actors are a scam and they're running away from it as as quickly

as they can. Uh. What Gary Gensler and others were saying yesterday very simply was, uh, you know, no matter who you are in the space, we're coming after you. And uh so you know, whatever is going on at finance, Uh, you know, Gensler is going to use the maximum amount of his power to try to bring them to heal as quickly as possible. I mean, that's that's the bottom line. Yesterday we saw resilience in terms of the shares of crypto companies as well as a bitcoin which continues to

rise today. This goes against what you were saying, or you said that this does not look like a bad moment from which crypto can recover. It's much likely to begin likelier to be the beginning of the end for crypto. Why do you say that with such confidence given the acceptance that the market has had of what has just transpired. Without some sort of massive disruption at least. I think what you've got here is a kind of a perfect storm.

You've got a situation where you've got uh yeah, what crypto is looking at in the future is years to come of investigation and investigations, potential indictments and uh and certainly enforcement actions number one. Number two. What you've got, you've got a situation where crypto is gonna be is going to be busily enfolded into the existing regulatory regime. The Biden administration. Regulators have been after this for about

a year. They've been really public about it, but uh, crypto people on Wall Street haven't wanted to believe it. Well as of yesterday, they should believe it, because that's exactly what Gensler and others are gonna be up to. When you combine when you combine that with the possibility of crypto exposure from more established players, what you do, what you're gonna get is a continued overall is a

continued flight of capital. Uh. And you know, people are not gonna want to be involved with something that looks like it's a potential scam that might get them in some some fairly serious trouble. So you know, you know, an uptick in all this. Uh, you know, given the

last year the crypto has had. Uh, certainly possible, but this is not going to be the force, not going to be the game changer anybody ever thought it was gonna be ter You started we started by talking about your comment about the strange timing that the Department of Justice didn't give it heads up to Congress ahead of releasing this indictment. Also with the SEC, You've had extensive work with both the SEC and the Southern District of New York with some of these investigations. Do you believe

that it could have been politically motivated? Um? I raised it as a possibility. Uh. You know, do I think it's likely? Uh? I certainly hope not. Uh. But you know what, what has happened here beyond the beyond the bottom line politics is very simply that the regulators and the litigators decided together that they were gonna push this thing forward uh and uh and shove Congress to the side as much as possible. Uh. You know, the SDN Y was very specific about bringing up the campaign finance

activities of SPF. The implication there is that one implication is that you know, Congress is somehow unable to strongly investigate this stuff because they had taken money from SPF F TDX crypto more largely. Uh, you know, I think that's dead wrong, by the way, But but but that's an implication of it. And uh, and you know, so what we're gonna get here is we're gonna get a competition between the regulators and the litigators on the one

side and Congress on the other. I think that's unfortunate, frankly, because it strings out much longer, Uh, the resolution of a lot of crypto issues. Hi, Terry, got to catch up. Set as always, Terry Hanks, the founder of pange A Policy. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern. I'm Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment,

and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg