Surveillance: Supply Shock Risks With Greene

be a Red Sox fan, and we've massively succeeded. With Megan Green, the only guest I know who has Red Sox vans when she's styling on the weekend at Harvard, and of course we welcome her. Is a global chief economist for Cole Institute. Thrilled she's with it that the news is so important. Megan, I'm going to avoid the baseball right now. The makeup of this trade deficit, is Lisa mentioned, Is that an export afferential or an important differential that gets us to this record statistic. Yeah, so,

as Lisa highlighted, it's a bit of both. And it is really interesting that it's happening as these talks are just kicking off between the US and China. China, of course hasn't held up its end of the bargain in terms of the trade deal that we had struck. They haven't boughten nearly the amount in value terms of goods that they had promised. Too. That seemed forgivable in the throes of a global pandemic that of course originated in China,

so they had massive shutdowns. Um, the best thing about the pandemic might have been that actually there was an excuse for China not actually holding up its end of the deal. But that excuse is really waned, and so now the US would like China to go ahead and hit the targets. It's a big question though, about how they're going to get there, or whether they're really incentivized.

That's gonna take forever. If the equation is why caill C plus G plus i g UH plus x M is the X minus M gonna change American GDP quarterly over the next year, is it enough to shift the larger parts of that algebra? So no, I don't think we'll strike something that actually fundamentally makes the difference in terms of growth. And of course, most of the growth right now is coming through the reopening UM and the

peaks behind us unfortunately. Uh, And I think actually the biggest impediment isn't really how much China is buying our stuff. The real impediment is going to be supply shocks globally. That's going to be the biggest drag on growth in the second half of this year. And those those things go together, right, I mean, there is this question of the fact that we do have this trade mismatch and the fact that China is perhaps in a better negotiating position with the US simply because the US wants to

import all this stuff immediately. How much does this give a sense that the supply chain disruptions may last some somewhat longer than people are currently expect. Day. Look, I think that even without this dynamic, this trade dynamic between the US and China, these supply disruptions will be a problem for at least the next six months, possibly longer. Um. I think they should be uh sort of eased up in the in the second half of next year for sure.

And so it feeds into this question about inflation and how much you think inflation is sustainable versus temporary. But also we economists aren't very good at defining what temporary or transitory and sustained are. And I think if you're expecting inflation to go ahead and wane in the next

three months, you're going to be really disappointed. If you're happy to sit through the next year and expect prices to be higher because of supply chain disruptions and you think that's sort of a one off cork of the pandemic, then you might actually see inflations start to come down in the second half of next year. Although it's not just supply chain disruptions. It's also a shift in the Chinese economy with a push toward making a higher wage,

toward bettering the middle class. And I wonder how much for decades we were importing disinflation, We were importing deflation from China with cheaply made goods. Is that reversing now as the shift for Jim Pink changes. Well, So that was the case, as you know, the iron curtain fell and the bamboo curtain fell, and we added billions of workers to the global workforce, and Chinese workers were really cheap.

That hasn't been the case for a long time. We just have been rising in China for a long time. Now we've had cheap work coming out of Vietnam, Malaysia, other parts of Southeast Asia. Wages are rising there too, So the question is, you know, where do we go next? If we're looking for cheap labor. One is actually two machines, So there's been a ton of automation over the course of this pandemic. That should ease some of the upper pressure on wages certainly. And then secondly, there are other

parts of the world with cheap labor. So if that's going to continue to be the model, which is too sort of offshore any production with cheap labor, and I don't think that is going to be the model. But if that's what we're looking for, you know, Sub Saharan Africa, North North Africa in particular the Middle East, there's there's a lot of room for that trend to run. So I don't actually buy the fact that we're running out

of cheap workers. I think that we are restructuring the economy through a new uh industrial policy that's actually accepted by both sides of the political spectrum right now. That means that we're not actually just going for the cheapest products made in the cheapest places we're trying to onshore some of that work with industrial problems. Let me ask you a Harvard question. This isn't a cruel institute question. It's a fancy pants academic question. And I can do

this in honor of Dale Jorgensen. How's our total factor productivity look right now? So we don't know exactly because that data comes out with a bit of a lag, but we do know that it's increased. So you know, for the developed world it was about one percent for the last decade. In the past couple of years, it's increased to around two percents, around double that. In the

US it was three percent. More more recently, we anecdotally through surveys that a lot of firms have taken the opportunity of the pandemic to digitalize and automate a lot of things, which should fundamentally boost productivity and and and it should boost productivity going forward. And then we also know there's a ton of legislation on the docket that's aimed at infrastructure spending, investment in human capital that should continue to boost productivity. And the good thing about productivity

growth is that you can have wage growth. And if you've got productivity growth as well. It doesn't need to be inflationary, but that might mean that the participation rate in the labor market continues to go down. At least the downward trend that we've seen over the past few decades is that what you're predicting that people would be paid more if they're in the labor market, but there'll be a high proportion of people permanently out of the

labor market. Yeah. Look, this gets down to the question whether robots are taking our jobs or not. Fundamentally um and I'd say, in in previous periods where we had a bunch of innovation and everybody was worried that we'd all be automated out of work, it didn't happen. We generated jobs. That are we couldn't wrap our heads around. When we built highways and had cars, nobody thought about all the rest stops that would generate jobs, for example.

So there may be an equivalent this time around as well. I think there will be structurally higher, uh sorry, lower labor first participation rate for a little while, in part just because certain certain industries aren't coming back, and so as a result of the shutdown and the transformation of our economy through this pandemic. There's just gonna be a lot of rigidities in terms of retooling and reskilling workers

for sectors that are coming back. And unfortunately, I don't actually know a country out there that does a good job with that. So that is something that we should absolutely be focused on. Tom, did we did the baseball think that'll be done that yet? You could do that? Now? John, you do it? Mecan Green, Red Sox fan, do you go tonight to Fen White? I don't actually have tickets tonight, so if any viewers want to give give them to me,

I would be gratefully receiving them. Corraine, unfortunately, but but I like service announced. Perhaps she should go with Tom will fly him up tonight. I am Marie. I think a Marie may be going. And she told me she was one thousand, two hundred thirty two dollars third base. Yeah, third base, like three rows behind third base. She's sitting in front of Stephen King. Okay, Megan Green, have you got any predictions? Yeah? Giving Megan give us some love? Come on, yeah, I mean I think the Red Sox

are gonna win. If not, because the best people root for them, obvious Okay, I was convincing making great Cenia Fellow at the Harvard Kennedy School and clubal chief economist. She took a minor John at Harvard and John Kelvin. I think that they going to win because the best people root for them. Right now, hugely anticipated. We speak with George Sarah Ellis of Deutsche Bank. He has arguably

the toughest job at the bank. It is Peter Hooper, It's Day, it focus Landau, It's Metal Zi and they're all churning away and Ruskin and Sarah Velos have to figure out how to sort out the inflation dynamics, the economic dynamics, and what it means in foreign exchange. Mr Sara Velos joins us this morning. What is your dollar call? Great to see you, tom So. I think the risks are you do see moderately stronger dollar until the end

of the year. Um. There is much more going on in the market than just the inflation story, which is dominated this year. UM. I was following with interest the interview you had with Muhammad Allarian just after the US numbers last week, and he was very focused on the inflation upside. But at the same time you had the big down side growth surprises as well to those numbers. And I think there's three things going on in this

last quarter of the year. Number one, we're getting extremely pessimistic messages on the supply side of the global economy. One of my favorite examples is if you look at UK total hours worked, it's still eight percent below where it was pre COVID, So that's still a massive labor gap, and we're talking about rate hikes in the UK um The consumer is just not gangbusters. So as John said before, this is not the same as Q one. We can

see in consumer confidence. The slowdown in spending was happening before the delta wave, and you're just not seeing the straw down in nexcess saving that people were expecting. So this week of growth dynamic with our inflation, I think that the margin is supportive of the dollar. Okay, so let's go there. Let's rebrupt the scripture your folks. We

can do that with George Seravellis and sterling. How do you express that view on sterling if it's not cable, which pair is the most intelligent tradeable pair for sterling? So the UK is a fascinating example. It's at the epicenter of what's going on where you're about to have I think of very sharp slowing in growth because you have fiscal tightening at the same time and the Bank

of England hikes rates. Now this is very, very different to the demand side cycles we were used to to to experiencing, and I think the risk is you see UK influence slow down, the growth side decelerate pretty quickly, and that would be negative for the pound. Now the polar opposite story of that is places like Norway. Essentially what you will see this quarter is a direct income transfer from the UK consumer to the Norwegian consumer, which

benefits from these big grices and energy prices. So we like sterlet selling the pound against Norway, but also against the Swiss franc and my colleagues have done some great work showing how the Swiss franc is one of the best safe havens in a world of rising inflation but falling growth. George, what are the lessons from trading, say e m X for some of these currencies in G

ten right now? Are they applicable? Well, it's an interesting question and I think probably most immediately relevant to the UK because you do have this environment in the m where sometimes central banks try to high rate but the currency stays weak because you can't see those inflo UM and e M historically has been more vulnerable to the supply side shocks. We're now seeing it for the first time in d M, and I think it's very interesting.

You know, at the start of the year, if I had told you the Bank of England could be hiking rates as soon as this year, you would have told me the power would be surging, and instead it's struggling. So this transmission channel, which usually a central bank hike does, as in strengthen the currency to push inflation down, is not working in the UK, and I think that asks all sorts of uncomfortable questions for the Bank of England. George.

Before we let you go, we have to deal with the S word, because you did write it in a recent report that this environment is definitively stagflationary. How much hate mail did you get for using that word in a time of still robust growth. So um, it's interesting. We we have a lot of internal debates within research. Obviously there's there's different definitions of that word. But for me, the key point is not how you define a world,

but that the trajectory in inflation and growth. And one thing that I think hasn't materialized for those that have been espousing the so called gangbuster narrative is you really haven't seen growth accelerating the second half of the year. You're seeing a pretty sharp deceleration. So it's a very

different playbook compared to the first half. Do you think, yes, what it is a distraction though, George, the very fact that we have to talk about it, because factually it's so hard to it's so easy just to turn around and say that's not what this is. Well, again, I think it is to the destination George, or you think it feels like that right now? Do you think that's where we're heading? I think debating definitions is not as useful as observing that you're seeing a pretty sharp slowdown,

and it's not just because of the supply side. It's because the consumer is underwhelming. But in terms of direction of travel, yes, I do worry we have more growth loud oncoming slow down coming in the pipeline, both because of China, fiscal tightening in the UK and the US importantly, so I worry that this mix continues and worsens. George, really smart note, Gangbusters ain't hammning. Great to catch up.

Thanks for coming on shy with us. George Saravlos, the Deutsche Bank Globo have head of FX research joining us now Chrisma RANKI camp Coco of value. Chris, let's start right here. It smells like Q one, it is not Q one. What's the difference right now for you? Chris? Yeah, there are some key differences. Interestingly, in Q one, I think expectations for nominal GDP growth we're probably something like ten percent. There's still ty percent, but the mix is different.

There's probably more of a waiting toward inflation versus real growth. As we see supply chain issues crimp real growth and those UH inflation pressures persistent and probably worsen. Chris, I have been dying to speak to you to know what the value house that Gabelly built thinks about the gloom on revenues in margin compression. I want to know what you guys think we're gonna see on revenues. Are they going to be better than good? Alright? I'm not worried

about revenue. There's certainly play me of demand out there pretty much across the board. The issue is can that demand be fulfilled, and we're seeing a lot of Obviously we talked about it, that nausea, bottlenecks and inability to meet that demand, and that in many cases has caused some some margin oppression. Companies have tried to pass through um many of those costs and and many have pricing power, but they haven't been able to produce to pass through

all those costs. And so the question is how persistent will those margin pressures be. Are we at new levels for labor costs, for example, for other natural resource inputs? And I think the answer is probably yes. I think once you raise wages, very difficult to take them back. So over the next few years, probably going to see some some margin pressure broadly in the market. What's being priced in? Are we being pricing in peak supply chain disruption or are people concerned that this is just the

beginning based on where pricing is right now. Well, you know, when you think something is priced and it's it's usually not. But clearly the move over the last month or so has been at least partly in response to a number of companies out there, particularly in the industrial area, warning about what their Q three is going to look like. Saying they're going to be at the low end of

their previously expected earnings, for example. So I think we're gonna see more of that as we go through earning season. Some of it's priced in, probably all of it isn't Chris.

I want to talk about the banks just briefly. Where you want to sit in the financials at the moment, the kind of business models you want to warn, the characteristics of those names, where do you want to be well, you know, generally, so banks performed well earlier this year in part because there was an expectation that rates would go up to the curve wood steepen, and that's generally good for borrow short land long, but also because they

were conduits for growth, conduits for reopening um for more consumers spending, more house buying, etcetera. And and I think that's been muted a little bit. Generally in the financials area. We're looking for non commoditized companies, companies that have some kind of a Moodele's tend to be the credit card companies, the American Expresses of the World, for example, which itself

is a significant beneficiary of increased travel spend. For example in PNA, so Um, that's generally where we we've been historically, and it's where we want to be going forward. I've got to ask about autos, you know, Chris, that's where Mario Gabelli began as a security analysts. Look in an industrialist gartment, says things that fall in your feet. I've got to ask about the people going after general motors trying to find value. Can hedge funds and stuff? Can

private capital even with small amounts of percentage ownership? Can they go after industrial America? Yeah? Absolutely? And and uh, you know, Jenna has found a new life as a as an E s G play. We we do have a sustainability fund for example, that owns it in part because of their commitment to electrification. Mary Barra has has been pretty vocal about that obviously, and and it looks like, um,

it's for real. They are really investing in products to compete with Tesla and others and think they're going to be successful. It'stock is cheap. Um, it doesn't. We'll never escape its cyclical nature. Um, but the cycle probably is in its favor for the next five years. That's fascinating. It's in other words, E s G considerations are a factor in what you put into which companies are potentially attractive, which could attract those E s G funds based on

what their footprint is. Yeah, I don't think there's any question that companies with good E s G reputation, good E s G scores have attracted capital and in many cases have garnered evaluation premiums and what we look for those. But we generally, you know, do have some clients and some funds that are sustainability and E s G focused and UM and they you know, there's certain requirements that have to be met and and GM. Actually, even though it's still relying on on the ice UM fit's that

I gotta leave it there. Chris always good to catch up. Chrisma Rani there of Gamco, the co c I value. He could do logs as well. More regular joins us right now. Schwab acid ce io and head of investments. Oh our love, love love. What you say about the development of new walls of worry for you and Lisian Saunders is that just means go along? Well, you know, that actually means we've got to continue to educate our clients and you know, the behavioral aspect of the market.

You know, which means you know, they will always be concerns. They will always you know, you can always find that gloomy scenario at any given time. Um, you know, it is true that probably is a little more difficult to think about the positives at the moment when you had a bad month like September. And it also on this on the same thing, the whole discussion about inflation, about you know, great luck in Washington, about supply chains, disruptions,

about labor market. It is very easy to continue to build that wall of worry and that usually that information gets in the hands of investors and consumers. I'm not talk to me about recency past the temptation of extrapolating out last week's price action through the whole cycle. Ama, how do we have with that? Well, it's uh, it

is a very natural bias. Is one of those called cognitive biases that you know, it is very well studied in the literature, which basically you just extravelate your your experience of the recent information that's it call is recency bias, and you actually think that that's what it's going to continue going forward. That happens in the bull market, that's what propelled bull markets. If you think about it, that is the whole idea of the foamal effect of fear

of missing out. But it also works on the downside, where you know people that have you know, a bad experience I think you were talking about earlier. You know the significant negative returns that we saw in individual names. Well, people extrapolate that and immediately gets the emotional bias to kick in, which gives them down on what how to make decisues. So recency vice is a very common bias.

Is one of the vices that that has recent the most, especially you know, during the pandemic and in the process of getting out of the pandemic. That's the behavioral finance of the investor. What about the behavioral finance of the consumer as they look at higher prices and they say, you know what, maybe I don't want to buy a washing machine because it costs twice as much as it did two years ago. Hey, maybe now it's not a

good time to buy a house. How much does this start to bleed and ingrain itself into the economic moment and create a slowdown in consumer spending despite pretty robust savings. Well we did, we did see already that you know is low down in consumers spending, you know, after the big you know, plush in demand, you know, at the beginning of the summer. So Lisa, you know, the consumer spending is slow down happened even before you know, we

actually got into the full delta variant. You know, there is a little bit of hesitation on consumers to think about, you know, what may happen, you know, going forward. You know, there's another another very interesting you know, behavioral finance. You know by us that it is called in down an effect, which means once you've got a lot of cash, you know, holding on it is very hard for people to start

thinking about it. Now. The good news, though, is that the consumers have delivered, you know, during this process of accumulating extra savings, they have actually delivered themselves to the point that they actually not as worried about you know, higher interest rates as much as they were probably three

or five years ago. So with that in mind, that actually assumes that you know, with a little bit of a pressure on wage growth and a little bit more of that you know, drawing down of excess savings, the potential for consumer is maybe not you know, as strong as people expected. But the holiday season going into next year,

it is expected to be positive. Omar how important given what you just said are bank earnings and their view into consumer borrowing, credit card lending activity there in order to determine what the appetite is for consumer spending, well,

it is, it is. It is important now you know, banks are in the in the in the framework that we're talking about is obviously related to you know, what the shape of the curve is and as well as you know as what the demand is for extra credit as well as you know, in general just the level

of interest rates. So you know, the process of where they have it's definitely not as as as strong as where you know, uh, at the beginning of this year, but certainly you know they're well positioned for for going forward because you know, we we do expect that there's gonna be a significant amount of extra demand for credit, especially as you know, investors and consumers and start to balance you know how much they actually have to draw from their credit and how much still with a low

absolute level of interest rates they can actually still use credit for Just to wrap things up, I hear a lot about the bomb, but I want to talk about on the one side of it the cycler cause energy banks. What you just said on banks is important. We've had a massive move and energy over the last month or so.

Energy equity is not just the underlying commodity. I want to understand what you do with that position now, are is it's something he sits on or you're looking to move into banks, banks which haven't really kept up at

all with what's happened with energy equities. Yes, so a couple of things on this, and I would probably say that the first thing is, you know, we are getting into that process of moving into that mid mid cycle, you know, the the in a way, you know, the announcement by the federal yourself about the tapering just extended

that recovery cycle where cyclicals continue to you know, outperform out. Yes, we did hit a little bit of a break in the summer because of delta, but you know, we continue to see that cyclical you know position, and we still think there is probably another quarter to actually go. To answer your question, John, you know where you can still go around those things where we will have the supply demand disruptions that will help energy, that will help industrials,

that will help financials. Now, we you know, we always encourage our investors to rebalance their strategy, and this is an interesting time because a negative month like September allows them to be proactive, especially in tax laws harvesting, and this is probably one of the things that is the most important in wealth management. Thank you, sir. I'm a Anguilla Show. I'm Asset Management, the CEO and head an investment.

This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live week days from seven to ten am Eastern. I'm Bloomberg Radio, and on Bloomberg Television each day from six to nine am for inside 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