Surveillance: Taper Time With Fed's George

my waist. After three meals at the Pioneer Grill, guess what It's not gonna happen because we've gone virtual. McKee's virtual, and the distinguished esther George is virtual. Let's listen. We uh had hoped for an in person meeting. We had planned that way, knowing in the back of our mind that that would be a function of how the virus unfull it and as we saw last week, risk levels went up and in the interest of our guests, we pivoted to a virtual platform. So disappointed, but still looking

forward to a great conference. We've got a great lineup of speakers and papers that I think are going to bring insight to an important topic. Well, you lead into an important question. The latest COVID spike. How do you think that is going to affect the economy? Well, I think it's a risk to the outlook. But what we've seen so far, and what I hear from contacts in our region, is the economy continues to grow at a strong rate. Consumers are still spending, the labor market is

continuing to heal. We saw a good job gains last month, and so the outlook I think remains a positive one. We will have to see what impact this flare up in the virus might ring. So you can imagine that it might slow down some of the returns to the labor market, but I don't expect at this point that it will derail the economy as we saw last year when we first had to deal with the virus. Do you think it slows down your time table for when you might want a taper, because you might want to

wait and get more data. I think for me, as I look at the progress that the economy has made so far, it really does suggest that we've come to a point where we can begin to ease up on the amount of accommodation provided to the economy. That's different than suggesting that we have arrived at the objectives that we have in terms of full employment and price stability. So I don't think that it changes my own calculus that it is time to begin to make those adjustments.

Given the gains we've seen so far, have you gained enough on the elements side, especially in the diversity area. Have we seen enough progress in terms of getting minority unemployment down? What's the labor market picture like? Well, clearly we have not seen the labor market fully recover, and there's still slack there when you look at millions of people that have not come back into the workforce, not

yet resumed working yet. And as you noted, when you begin to drill down into who's recovering who's not recovering, we know that there is a disproportionate outcomes right now for black and Hispanic workers. That I think is a function again of watching how the labor markets heal and how the economy recovers, and to the extent some of those contact intensive sectors can continue to break jobs back on and we saw that last month. We saw leisure and hospitality UH come in pretty well. If those kinds

of gains can continue at a healthy pace. Then my expectations we will continue to see, uh the impacts begin to narrow across many dimensions of the labor market, and that would be a good sign. Is there any division on the Open Market Committee about when did taper at

Wall Streets? Making a lot out of the fact that some people think we should wait till the end of the year, and some say we haven't seen enough progress, And then there are people like you and other colleagues who say we've made enough progress to begin thinking about So this is a big committee, as you know, and one of its real strengths is the diversity of us. It brings to looking at a common set of data.

That's a healthy discussion, and um, you often see those differences emerged at the point that the economy is turning. So it's a healthy sign for the Committee to be again to debate and deliberate on those issues as we judge when we've made progress towards the objectives that we've set out for the economy. Yeah, I'm just wondering if

if Wall Streets making too much of it. You know, the idea of whether you say something in September or November, is that cutting the policy to Finally, I think what we've been focused on and you've seen is a commitment to communicate clearly, to make sure that we are being transparent about the factors that are being considered for that

transition as it relates to asset purchases. And I think that's what's been happening um the the markets, the public has been hearing those communications, and of course we're coming into a meeting in September where we will continue to talk about how the economy has unfolded and the timing for adjustments to those asset purchases. Interesting story today about how Wall Street doesn't care as much about when you

begin the taper as when you ended. Uh, what's your view on how fast you would want to get out of the QUEUEI business, So I think it's important to get started and the conditions of pace, timing of when we end. I think I'm open minded to listening to the debates around that, but I am less interested in

deferring that decision. So I think it's important to really center on when we believe the progress in the economy is sufficient to start that process, And that's really where I'm focused in that sense, I think we should get started this year, uh, so that we can begin to uh pair back the amount of accommodation, watch to see how the economy unfolds after that, and then down the road be in a position to make decisions as the

economy changes on what we need to do with our policy. Right, I'm gonna guess that you would agree with the Chairman Powell that tapering is not tightening and that the two are not connected. But the way traders see it, you at this point, because of what the Chairman has said, aren't going to start tightening until you're done with tapering. So uh, there is a bit of a connection on the back end. And I'm wondering if you agree with the members of the committee who say we should get

it done faster than we did last time. I think there's good arguments for that, um again depending on how the economy unfolds. Uh. The arguments that ending the asset purchases will give the committee some flexibility to judge the progress in the economy. But I don't think that's in any way a mechanical decision and one that we can

lay out today. Whether it's a certain amount of months, the conditions really that have been laid out in the guidance from the Committee has been that we will have achieved maximum employment and price stability objectives when that rate decision is made, whatever decision you make about the pace of taporing, you're doing a hundred and twenty billion a month right now. At what point would anybody even notice

in the economy. Well, I'll be watching for that um at the point that begins, because it is a tremendous amount of accommodation going into the economy right now. And assuming communications have been laid out and the committees um response to how the economy is unfolding is clear, Uh, you would expect the economy to be able to work

through that. And that is my expectation that with good communication, with clarity around the factors that we judge are pushing us toward our mandates, UH, that that will all work out in terms of the omy's ability to absorb that. The minutes of the last couple of meetings suggests that you've all basically agreed that you've essentially reached your mandate on the inflation side. So I'm wondering where Esther George,

the inflation hawk is at this point. What do you think about the progress of inflation, and do you have some concerns that maybe it's not transitory. Well, I think watching the level of inflation right now certainly has gotten my attention. It's gotten the attention of many households and businesses in my region that frankly hadn't had to think about inflation for many years in their decision making, So

it's not something to ignore by any means. Having said that, I do think that it is reasonable to assume that what we're seeing right now is coming from the combination of robust demand running up against supply constraints, and that of course is keeping upward pressure on prices over time. I would expect that to moderate, and that I think is a reasonable assumption to make. But that, of course

will depend on a variety of other factors. To what extent, UH, does risk from the virus affect those supply chains, will they become more persistent? Will it begin to build into people's expectations in a way that will cause us to have to rethink that policy accommodation UH different than we are today. You've always been on the lookout for inflation and one of the first to warn about the possibilities.

So I'm wondering if you think we would have time or you would have time since I don't have a vote, you would have time to react if inflation proved not to be transitory and that you're not behind the curve. So it's hard to say today, given where we are in this recovery, Certainly the Committee has the tools it

needs to respond to inflation. That, of course, is always a function of understanding what's going on in the broader economy, and it's hard to judge, but I think, uh, no one should question that the Committee is committed that I'm committed to a two percent inflation objective over the long run for the economy, and we'll just have to see how this transition in the economy from a terrible pandemic

shock to beginning to recover from that unfold. I have to ask you one last question on a fiscal side, uh, leaving aside the merits and the partisan issues involved in the budget that was just passed by Congress, do you worry that billions more, hundreds of billions of more in UH spending would be inflationary? So I think the question of fiscal spending is one that I'm going to defer

to fiscal policy makers. UH, to a judge, I think as a monetary policy maker, I will be watching carefully any number of impacts our economy, including fiscal spending, to understand how it might change the dynamics for how we achieve the objectives that Congress has given us. I actually have one more question, and that is you talked about the great guest lineup you have. There's one in particular that everybody wants to hear from. UH. The minutes of

the last meeting said no decisions were made. So I'm wondering what we should expect from the chairman. Is he going to be giving us guidance or opinion? Well, the Chairman has not shared his remarks with me, so I could not honestly tell you what he'll be offering, but I'm sure it will be worth listening to. From the Midwest, esther George and the Kansas City Fed and a decidedly different president. Of fact, she does not have a PhD

in economics. Think James Bullard and many others who do, but just to simply do front path replacing Thomas Hunting. Do we start strong at this hour of surveillance with Russ coaster Ridge, with black Rock Global Allocation fund portfolio manager, someone who really can synthesize the moment. Russ, why do I want to own bonds? I just don't get it. When I see where yields are your short duration, I get that, But what is the waiting of bonds right now?

Or do you just run to dividend growth? You know, if you're talking about traditional treasury bombs, there not a lot of reasons. Uh. You know, obviously the income is not there, and what we think yields are gonna back up a little bit by your end, you're still getting a very paltry yield. The reason you held them for much the last ten twenty years was they act as a risk ntigant. They had a reliably negative correlation with stocks.

They provided some downside protection the portfolio, Thomas, you know they're not doing that right now. We've seen at the correlation has been somewhere between positive and zero for much

of the last six to nine months. And honestly, there are other ways to think about risk mitigation, whether it's being long the dollar, whether it's using volatilities and asset class So the short answer your questions, I think today other than parts of the bond market, whether you're talking about e M debt or securitized that offers some yield, you own a lot less bonds than you used to. RUSS ten Equity markets continue to rally if treasury yields ten year treasure yields go up to one point five

one in short order. Absolutely, I mean, I think you know this, this is the big question. But if you go back and you look at history, you've actually seen, you know, contrary to what a textbook would tell you, that multiples in real rates in the US have tended to co move together. And there's a simple reason for that.

It's because when you see that modest rise and really yields, particularly from these you know, absurdly low levels, it's come in the context of a better economy, better earnings growth, and that's environment where both equities and multiples tend to be solid. So I don't think the ten year in one five, one six, one seven is a big threat to the equity rally. If anything, I think the tenure one five, one six, one seven tells you monetary policy is getting a bit more rational and the economy solid

and ermine's growth it's likely to remain strong. RUS what does a policy mistake look like right now? From the FED? So there's an interesting HSBC notes saying, actually, the inflation is transitory, but it's the biggest danger at and that now that at any point since the central banks became independent in the nine nineties. You know, I think there is this question about you know, inflation I believe is transitory. But because we've spoken about in the past, transitory can

be a long time. Transitory can last six, nine, twelve months, given the inflationary pressures you have. So getting some clarity about tapering, getting some clarity about how long that's going to last. I think the FED would do well to start soon, give themselves the optionality to be able to raise rates in late two thousand twenty two if inflation remains more persistent than they think that would be healthy

at this point in the cycle. Whereas very quickly here I've lost track and I'm fascinated with what you think. What's the bet of the street right now? Are we way overweighted in equities? Are we are hedgephones loading the boat on equities? What's that tone in the malaise of August? It's Tim's really interesting. We spend a lot of time on this and you come to different conclusions. Up, clearly,

people have been buying stocks. The flows have been very strong, but there was a very long periods we know, when flows were persistently negative in stocks and people were buying bombs. We look at other measures, We look at some of the surveys, Uh, some of the retail surveys. They're not that bullosh. So look, I think people are long equities. It's not obvious that you have the extreme crowding that you had earlier in the year. And the reasons of

that is we've seen these violent rotations. You know, in most of two thousand twenty when stocks were rebounded, it was all about secular growth. Then it moved to cyclicals. Now it's tilted about a little bit back towards growth. So while the markets continue to grind higher in this very steady fashion, you know, as you as you well know, under the surface, you've had some very violent rotations which in my opinion, have kept parts of the market from

getting as crowded as they might be. Russ, How concerned are you that we saw the first decline in leveraged and borrow money to buy stocks going back to the beginning of the pandemic, the idea that suddenly people are reducing their riskiness or at least how leverage their speculative

positions are. Honestly, I think it's healthy. I was probably a bit more concerned earlier in the year when leverage levels were were extremely high, when you had, you know, these enormous surges in volume for small and MidCap names that were trading not on fundamentals but purely un momentum, When you saw all of the meme stocks just erupting higher without any good reason. Uh. If anything, the market

has actually calmed down a bit. And one of the really interesting things is if you look at again, what's been working, uh, since February, since March, since yields peaked, he moved away from some of the more speculative parts of the market, and you've actually moved towards quality. You know, what's worked in the last six months has been companies that are profitable that if consistent earnings with modest leverage.

To me, that's a healthy sign that fundamentals all reasserting themselves. Russ, thank you so much. Russ Coster to us with black Rock on a global allocation fund portfolio manager. This is the important conversation today of your emotion of what to do? You know the cliche, there's a wall of worry, and Darryl Cronk is esteemed and able to write about it wells Fargo, here is there, Investment Officer, Darryl, I love, love, love your note because you go to the emotion of this.

Forget about Fabozzi, forget about the textbooks, forget about all the fancy stuff you say. Here are the worries. You gotta fade these, You gotta follow closely these, and you gotta fear these. Let's start with fade. What do I fade here? And the worries that I can ignore? Well, I think there's a good morning Tom first of all, and good morning Lisa and Francy. So I think there's

a number of them that you can actually fade. This one may be a little controversial, but I think from an economic and capital market standpoint, delta is one of those. You can't fade it from a health standpoint, but I think you can fade it from the economy. Uh. Just note the up in the SMP fifty one new eyes um that was just discussed. You know, there's just there's some violent rotation under the surface from growth to um cyclicals to bond proxies and back again. But beyond that

market still move higher. I would watch the debt ceiling. I think you've got to fear the debt ceiling. UM. Yeah, September is going to be a white knuckle events. I mean, you've got a whole bunch of things going on there with the budget resolution, You've got perhaps the uh, certainly the debt ceiling, and we're in extraordinary measures. You've got

the reinstatement of Powell, Darryl. This is important. I want to underscore this September is going to be a white knuckle month at a time when we have all bears basically blown out of the water and everyone trying to get more bullish and absolutely everything. Do you think that this is a problem setting up for sort of a perfect storm, if you will, in the next few weeks. Yeah, I do think it. I think it's going to be a lot of headlines. I guess that's what i'd say.

You've got You've got the bipartisan infrastructure package, You've got a three and a half trillion dollar spending budget legislation, You've got a potential government shutdown, You've got the debt ceiling, and you've got the reappointment of uh FED chair Powell, all of which has to get somehow resolved in progress in September. We know where the politics are, so this

is a real risk. You'll remember, you know, ten years ago this month was it was August two thousand eleven when we downgraded the U S debt as a result of the standoff. So um that had a decline in consumer confidence, in a decline in the SMP. So. Look, I think at the end they do find some resolution, but it's not going to be without some of those white knuckle events. And I think it's going to create

a September to remember out of Washington. I like that September to remember how much white knuckle events will come from currency volatility and actually, how will that if we have a volatile dollar going into a FED meeting, how much will that wipen it up? Um. We actually think the dollar is is kind of in a near term peak. We think it's in a longer term kind of channel sideways trend, but a near term peak with some weakening here, which is part of the reason you're getting a little

bit of that bullish sentiment. People are turning things back on. I think what's interesting here, though, is if you get under the surface, right, pay attention. I'm paying attention to high yield spreads and credit oss. They're up fifty basis points in the last six weeks, right, there's they're quietly leaking higher, right, so we need to pay attention to that. You've got merging markets are now negative year to date, and you've got copper and oil both off double digits

from their previous highs. So there are some things we gotta pay attention to there. Darryl Cronic, thank you so much. Too short of visit. We got to this longer next time. With Wells Fargo, their chief investment officer, what you want to hear about is the equity market dowty thousand, four zero five. Sam stove All a few years ago was sitting on an acclaimed father's lap considering the Dow at

three fifty or whatever it was back then. With CFRE and their chief investment strategies, Sam, we get heated mail when we talked to bulls. What's the level of your bullish belief right now? Well, good morning, Tom, and thank you for that intro yeah, I never crushed my father's lap, but uh, good thing I haven't sat on it in a while. Uh. Anyway, you know, the feeling is that

the path of least resistance continues to be higher. Even though we have seen a creeping up of the ten year yield, we're still seeing investors gravitating toward the growth side of the equation, also looking toward real estate, etcetera. So, uh, twenty is our target? You have you have at least a Please go ahead. I'm sorry my fault. No, no, I mean Sam and no, no worries. It's just you know, I got to jump in because you talk about forty hundred. You sound like a bear. I mean, honestly, this is

a market where people can't get bullish enough. And are you also thinking five thousand, six thousand, seven thousand and projecting out incredible earnings and returns for the foreseeable future. Well, what's the old saying? You you target a price but not a date, or you pet forecast a date but not a rice. Uh so, yes, those numbers that you

mentioned will be attained at sometime down the road. But I think we also have to make sure that we are risk mitigators at the same time, we've gone three times as long as we normally have between declines of five percent or more. I think that the market is vulnerable to some sort of an upset, whether it comes from a policy misstep, whether it comes from geopolitical factors, etcetera. Uh So, I think that we really have to just not assume that the sky is the limit. Sam, How

do currencies actually play into sonder? Equity calls? Good morning, Francine. Well, currency is an important part when we look at the technicals of the Euro versus the US dollar. Uh. The weakening that has been experienced over the intermediate term implies that investors do expect interest rates here in the US to be picking up, possibly because of the FED initiating their tapering in the fourth quarter of this year, possibly because of the continued improvement in economic activity, and maybe

even the peaking of the delta variant. SAMs. So you are acclaimed for understanding the vogue of the moment, the fad. Remember Tick. Everybody in the world stopped like fourteen times a day to look at the TICK data and there was this a put color ratio went on. What's the fad right now? Where you say, get your radar up and be cautious. Wow, no pressure there, Hunt Tom, No none. Well, and I think the fad really is growth versus value. What kind of a rotation are we possibly going to

be seeing right now? Investors are chopped full of growth stocks once again, whether it's tech, consumer, discretionary, communications services, And the real question is when or if, and I think it's more in none and if that we see a rotation back into the value side of the equation. Because the economy is expected to be improving, we are likely to be seeing passage of one or both infrastructure packages and we will start to see the tenure yield

creep up once again. Meanwhile, Jim Bianco was on Bloomberg Television yesterday and he was talking about the FED put that's sort of implied in markets that there is this belief in stock investments that if there is a big draw down, and big draw down could be five to the FED will step in, they will decelerate their tapering, they will become even more accommodative. Do you agree that there is sort of this implicit backstop baked into valuations

where they are inequities right now? I think that could be a mistake to assume that the FED will be stepping in should we see a five or even a ten percent to climb, because those are fairly natural in the stock market. And I think that, if, however, we do start to see the stock market fall into a market territory and that there is an astual risk to our financial system, then by all means the FED will step in. But I don't really think that the FED is going to be stepping in, you know, if we

trip fall and just scrape our knee. Sam so far. We spoke the other day of the tenth anniversary of Steve Jobs resigning from Apple. Everybody, including me, got that wrong. What was me? Steve Jobs he died tragically on October five, ten years ago. And this guy Tim Cook, he can't do it. And as you have chronicled Apple to the moon, how do you know when to get off these stocks that just go and go and go and go. Well, you look at the fundamentals, you look at the technicals,

and you listen to here analysts. Um, what's the old saying? Uh, the analysts do the work, but the investment strategists take the credit. Uh. So you know I love that. Here I hear what Angelo Zeno says about Apple, uh and and wait for his commentary. From a fundamental perspective, what's he say? What's he say? Right now? Right now? Still a favorable outlook for Apple. We have it ranked four stars, so it will in a better bonus on it. I folks, so much of this is not making money, it's not

losing money. And when I lecture on this and Stowall doesn't get a royalty, I say, nothing helps you not lose money like the star system of cf r A. It is a great and beautiful thing. Mr Stovall, go away. Thank you. That was a clinic. Thank you so much. Sam Stolaw just I can't say enough about his work.

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. Asked on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg m