Surveillance: Time to Act on Inflation, Says Rogoff

of international relations. Kenneth Rogoff of Harvard University that joins us here and of course with his public service to the International Monetary Fund, a good tour of duty there a number of years ago. Ken Rogoff, I want to play right now for you and for our radio and television audience the comments of Adam Posing at the Peterson Institute on a need to lift inflation. Let's listen. One of the problems that we didn't foresee when we put in place inflation targets was we assumed it's in the

books that we wrote. We assumed that you would be able to reset the target as economic knowledge and circumstances changed. We've never seen targets get raised for inflation targets. We should be opportunistically reflating. We should be saying, okay, inflation is now above three percent, let's re anchor it there. Ken rogoff Off your important book, one of my books of the year, The Curse of Cash? Should we fear the curse of inflation? Well, you know, it's not a

crazy idea. I think that's a second best idea by far. The most elegant long term solution is cash is marginalized, is to move to effective negative interest right policy. But it's not crazy. But I mean the timing would be a little bit awkward. Right now, this isn't a gradual rise of inflation three They've lost control of the game here, and I think they kind of need to demonstrate that could if it's still high in three or three years or four years, it might be. I mean, I think

this conversation will come up. Although I have to tell you, Tom, if lal Brainerd had been appointed FED chair, she was pretty sympathetic to this idea. I have a feeling to your own Powell might listen to it, but won't be who lost control of the game. Well, I mean, you know, the positive spin on policies simply that uh, they were

buying insurance. Things turned out much better than we thought, the vaccines, the recovery, and so there's inflation, and it's sort of good news because it could have gone a lot worse. We could have had deflation. But I think that story is getting harder to tell, you know, really, starting six months ago, I think he was getting kind

of clear that wasn't where we were. And the stimulus, particularly the March stimulus that Congress and the Biden administration put in place, was too much, too late, and the FED really pushed back. But then again, we wouldn't be talking about Chair Jerome Powell now, we'd be talking about Chair Lyle Brainer. I think with that hanging over his hattie really couldn't come Chet's stuff till your seminal graduate

work with Maurice Hobsfeld. With what Stan Fisher road in and the system that Jerome Powell's in right now, does he need to fear instabilities or jump conditions as central banker of the world. Well, I think we're talking about inflation that tends to move gradually. Now. I know it hasn't felt very gradually in perspective, but when you look at you know, the great hyper inflations in Latin America in the eighties and nineties and the new Soviet republics.

I mean, it actually takes a while to take off. It doesn't happen overnight. Um, but uh, you know you need to react at some time. Now we're talking about a crisis. If we're talking about another banking crisis, corporate debt crisis, that can come much more suddenly. I think emerging markets and development economies are just an accident waiting to happen now. And if we're talking about the FED being behind the curve, the International Monetary Fund is perhaps

even more so. But I you know, I think right now, if we're talking about inflation, there is time to act. It doesn't mean that the longer you wait it doesn't get longer and more unpleasant to unwind it. I wanna double down on this whole idea of an accident waiting

to happen can in the developing world? How much does that really hinge on the idea of a FED that most people think will be able to have controlled rate hikes, but some people worry have gotten a little bit out of control and are going to have to hike much more quickly. Well, it's certainly very sensitive for the hiking more quickly scenario. Uh, there every many many countries that sort of have access right now suddenly wouldn't That would really be catastrophic. And I'm not talking about a four

percent high. Just if they had to hike by a full percent next year, I think that would trigger problems. But they're already a lot of problems. And what we call the frontier emerging markets. Uh, you know countries obviously Argentina eleven on have defaulted, but you could look at countries like each of Pakistan gonna really or you know, have very high debt, not a lot of market access,

double digit inflation in some cases. Uh, you know, very different picture there, and there's not a lot they can do if there's a rapid FED high. And again I think the I m F has been behind the curve on this sort of not putting any conditionality, which made a lot of sense early on when it was a catastrophe, but as time has gone on, they haven't filed back. It's very similar to the FED going back to the FED.

It can There was an implication in your comments earlier about how FED share J. Powell had he been more honest in his assessment six months ago about how he saw the economic picture he would not get renominated. What does that say in terms of how political the Federal Reserve is right now and how much market participants can

trust the messaging that they're they're putting out there. Well, you know, there's always pressure on the Fed up to the reappointment of the chair, So that's not something new. Donald Trump was, you know, pressuring Janet Yellen in that period. I think she resisted more. The fat has become very politicized. It's a reflection of our society. It's a reflection of what they live in, what they have to put up with. And I think Jerome Powell is going to do his

best to steer away from this. But but it's hard. Biden has a lot of appointments. There's all kinds of indirect pressures they can put on. I certainly we've seen a period where a lot of endemics have said we should have fiscal dominance followers, or policy shouldn't do that much, fiscal policy should take over. That's been actually almost a central theme and a lot of research we've seen it's nuts.

I mean, fiscal policy is very political it should look at long term growth, distribution of income, trying to manage cycles. Look what happened in March. I mean, it's a perfect example of fiscal policy coming in too late, too much, wrong timing, and who knows, we may end up tightening now more than we need. You kind, I want to get to something that you know better than most Tom and I get some hate mails sometimes and hate mala had in the last twenty four hours is why don't

you use the H word hyperinflation? Why you're scaned of it? While you're using that? I was just thinking, professor, if you could distinguish between problematic inflation the mid single digits, the high single digits, and the H word, and what happens when we cross that line and lose faith in

the underlying, underlying means of exchange. Can can you walk us through that that dividing line, so you know, we put having a hyper inflation that's something like two thousand percent per year inflation, not even a hundred percent the United States. I think, Pete, if you look at annual inflation around thirteen percent back in the nineteen seventies the UK and Japan went over, that is not hyper inflation. Venezuel has had hyper inflation. Uh you know Zimbabwe and

two thou two millions of percent inflation. Hyperinflation is a hyperbolic word. But on the other hand, let me tell you, if we got to thirteen percent inflation for a year, it would feel like hyper inflation in the United States because we have very complex financial markets, they're not built for this. You know. I think we could well see inflation stay up at three and a half four percent

in a couple of years. I mean, I don't know that it's the modal outcome, but it's quite possible because I think as they try to start raising interest rights, they're o'clock, Tom, that is high corporate debt, public that the stock market, housing prices, you name it. Yeah, that wasn't the case in the early nineteen eighties. I worked at the Fellow Reserve under He was very grave, but he wasn't going up against that professor. This is a massive change, and some you and I've talked about it.

It might not be higher inflation. We now we near those conditions, but somethink double triple to two we used to Tom, that's a massive change. I have this conversation with a bit late on the open with Premier Bub Michael and Jean Bavan. Great lineup, gun into the open. I really want to know, John, I really want to know where Priam Misers is. If, in the words of the professors, in a couple of years time, we're still up there, how does that change things for this market?

Very much? We continue with Kenneth Rogoff and welcome all of you on radio and television. Will do equities here in a moment on this FAT day, Dr Rogoff, As you mentioned Paul Boker, I want to go back to the courage of nineteen seventy nine. The Doom and Gloom crew wants vulcar courage right now. I don't hear that from you that that is needed right now. What is the prescription not only for two thousand twenty two for the FED, but what kind of courage is necessary here

for our monetary economists are leaders on this theory? Well, you know, we're in this pandemic where there's tremendous uncertainty. I think in nineteen seventy nine it was really pretty clear what would happen. There was an amazingly broad consensus that the FAT needed to do something and the politicians but pushed back against it. And I'm not Churchimmy Carter knew what he was getting into what he appointed Paul Boker,

but Paul worker to the job in Greenspan, followed up, etcetera. Today, I mean, there's obviously a lot of lingering on certainty. I mentioned at the beginning that everybody was offs terrible, they're they're idiots. Well, I mean, that's it's Monday morning quarterbacking. I didn't know when the when the pandemic broke out that we'd have the vaccine as quickly. We didn't know how much we'd adapt. I mean, there were predictions about it,

but the modal prediction was for much worse. I think the mistakes have come, you know, more recently, where he's going to have to be courageous. He's going to raise right next year. It seem pretty likely to me. Where he has to get courageous is you know things are going to start seeming a little shaky, there's gonna be pushed back, and we had inflation still be up, and you know what if he needs to take rates by two years from now to uh that that could be

you know, it's easy to write on paper. But that could be very, very difficult to steer politically, Ken Rogoff LUSA, and I would like to shift the conversation to this mystery of two thousand twenty one, which is the ascent of bitcoin. You were out front on this with the Curse of Cash, looking at cashless societies, the criminality of the system. We looked at negative interest rates as well.

Your thoughts on the endure ability of bitcoin and crypto and I take this off of Alan Hour's work at the Bank of International Settlements fold bitcoin into your seminal work, the Curse of Cash. Well, I talked about it extensively the last part of my books all about central bank digital currency and UH cryptocurrencies. I think the thing I would say I got wrong was the pace at which

regulation would react. Regulation does need to react, I think, much more dramatically than it has I suspect eventually, UH pseudonymous cryptocurrencies are basically going to have to go band in the advanced economies. And that was sort of a prediction of my book, as it was just too easy

to avoid taxes, too easy induced. I mentioned before the program, I'm doing a lot of research on these issues now, but boy, you know, the dynamics of regulation, you know, bitcoin e t f A, allowing the big investment houses to set up you know, funds and current retention funds to invest. An analogy I like to make is a little bit like what if he found a diamond. Et f was a really good idea, Okay, I want to invest in, and then what if I tell you it's

blood diamonds that you're investing in. I mean, if you look at the actual uses of pseudonymous cryptocurrencies, I don't think it's something we can tolerate. But I got it wrong five years ago at the pace at which this would happen and drag out for a long time, and therefore they can have a lot of value because I mean, oil and gas have a lot of value even though we think we won't be using them in four or

fifty years. Lisa, this is incredibly important. I thought you just heard, Lisa, was James Diamond falling off his chair down on Park Avenue. To deal with this, I mean, Lisa, this is incredibly important. How the regulation, how Gensler hasn't stepped in well, and he has been pretty vocal about

the need to do so. In trying to be a little bit more aggressive going forward, But there has been a feeling of by the government to not want to stifle innovation at a time when the technological advancements of the United States have really driven a lot of the growth. Professor Rogolf, there is a theory out there that when you pull the tide back at a certain point, there

is a lot of malfeasance. There are a lot of very frothy spots that would get knocked out, and that the Fed cannot allow that to happen because that would torpedo and economy that it has very few tools left to accurately prop up. Do you agree that the Federal Reserve in the modern incarnation is going to be vastly more involved in activists just by virtue of the potential consequences If they're not, so you're going beyond cryptos I am yeah. I mean, well, I think it. I don't

know if it makes them more activists or less. I mean, I think in the immediate future, the next few years, the difficulty for the FAT is that they might need to raise interest rates cyclically quite a bit. And and and frankly, I think the three basis point drop in real interest rates that's happened since two thousand and seven. Looking at the ten year UM, I think part of that trend, maybe a third of it or sixth of it as trend, but some of it's not, and they're likely to have

to retrace some of that. And at these market levels, you know, you can just go down the asset list of everything. It's going to be very painful. And that's why I suspect that despite the tough talk that we're going to get now, when things start pushing back, they're going to find it harder to scale back than they think. I'm not saying, you know again, I'm glad we're getting out of this. I'm glad the economy is recovering, but

it's they're in a very difficult spot. Thank you so much for an extended conversation with Harvard University, and of course the Cursive cash wonderful, as well as other work as well. Ye let us start strong with David Constance. She few us strategists at Goldman Sex. He's been a huge advantage to us in describing a bullmarket that he needs to be invested in the big fear right now. David is a silliness over Breath five stocks going up, everything else terrible in the fear of a draw down.

Tie the two together. Well, the subject of a drawing down, of course, will bring happiness to at least that you hear about that. But the idea of a narrowing breath market is I think an important characteristic of the last

six months. So there's been a relatively few stocks that have driven the market to these pretty much record levels, and the history would suggest that over the next three or six months you'll get a larger than average, a deeper than average draw down, say, for example, instead of a four percent draw down over time, over a couple of months period, may likely get an eight percent draw down. That's what history would suggest. Once there's such a significant

narrowing of breath in the market. However, if you think about where you end the not just a year, but over that period of time, equity prices likely to be higher. Why is that the case? All of the focus today and your conversations before have been about the announcement of the FED today and the dot plot and the tapering.

All those are important, but the fundamental issue and equities has been this year you've had a huge spike in commodities, You've had supply chain disruption, You've had difficulty in companies finding and keeping employees, and you've had the variants the delta and an omicron. All these issues. Yet profit margins in the United States across every sector or at record high levels. Managements have been very nimble in basically dealing with these these issues. And so we look at the

two earnings up around eight percent. Largely economy is still growing at a decelerating pace, margins increasing slightly. That is the story for two. You have a flat valuation, in my opinion, that's how you get to five are up roughly maybe eleven percent, told to return when you add and dividend yields. So, David, just to be clear, I'm not rooting for a down draft here, but I do think a lot of people have been talking about how

things look perilously valued. Your argument is they are not because you're going to get the ongoing margin, a sort of incremental growth in terms of how much they're expanding.

What's the down case scenario, just because I want to be in brand here, you know, what's the sense that we're going to get some kind of rate hike or savings accounts that get depleted and the consumers say, no, Moss, We're not going to accept and give you money and not only pay you enough for more inflation, but then more.

The least of the disconnect and the discussion with most portfolio managers relates to the situation that fast growing companies that are fast profit forecast fast fast group profit growth and high margin companies trade at race basically the same valuation as fast growing but negative margins losing money or very thin profit margins. Those two uh groups of stocks is anomalous that they would be trading it roughly the same valuation. To give you a number, roughly sort of

nine times enterprise value of sales. What are we talking about. We're talking about companies with a forecast to say, revenue growth both sides, but some are having margins, others basically companies losing money. And the issue is as rates go higher, and to be clear, that is the forecast of golden sects, a tenure treasury yields will climb towards around two p

at the end of next year. In that environment, it is exceedingly unlikely that you get the same valuation for these two groups of stocks, and the idea the market is unforgiving if companies which have high revenue growth and all the valuation is dependent on that revenue growth, as compared with companies where there's rapid revenue growth but there's

also high profit margins to work with. That's the central tension in most conversations with fund managers because so many of the money losing, loss making growth stocks are very much in the meme aspector of the uh sor the glamour stocks in the market that everyone has has been so benefited from in the profit over the last couple of years in terms of performance, David, the obsession now, as you know, is to look forward twelve months. Can

we just reflect on the last twelve months briefly? I remember about twelve months ago looking at your original forecast for the SMP five hundred, which was forty three hundred, and when that first came out, I think the SMP was in and around thirty five hundred, and we looked at your forecast, looked at JP Morgan's which was a little bit higher, and everybody sat there and said, come on, this is ridiculous. We're really going to have a year

that big. We broke through forty seven hundred before we got to the end of the year, David, I wanted them to stand from your standpoint when we play this game each and every year at this time of year, when you look back twelve months, what's been the biggest lesson for you in the team as you speak to clients. So the biggest lesson, and you're right, at this time last year, our forecast for the SMP five hundred at

the end of and we lifted that in August. The biggest surprise has been the resilient In my opinion, the biggest surprise has been the resilience of corporate margins. Uh and that's been a key driver of why you've had earnings and has really been an earnings led market. I think that's really the most important development. It has not been a valuation expansion story. It's been a earnings led market.

And I looked into Jonathan and that is the same outlook that we're anticipating, which is earnings climbing around eight percent. The other aspect that was surprising to me is all year long, and when you've been invited me on as a guest most of this year, we've been looking and handicapping the probability of a higher corporate tax rate. We were assuming most of this year there would be some legislation pass some reconciliation led inislation passed this year and

affecting and head wind to profit growth next year. But now it looks as though whatever legislation may or may not be passed, and I do expect some legislation be passed, but that tax headwind tax hike will not affect company profits until three So basically that extra earnings in yours in yours to the investor. That's the other so profit margins and the lack of an increase in tax legislation I think have been a too surprises to me. David.

Your distinction, as you say, just shut up and own him, own a high growth, own high margin, own high profits stocks. And there's x number of those as well. Are they under owned or over owned right now? Well, it depends if you want to talk about the hedge fund community or the mutual fund community, so Tom, and that makes a difference distinction which which clients we're looking at. So if you look at the hedge fund community, the leverage community,

by basically owning the leading stocks in the market. That's been persistent for twenty years. We look at this every ninety days and been looking at this since two thousand and one, and that's been pretty much in the last you know, four or five years, the same stocks, the leading stocks in the market, largest companies in the market

have been dominating their performance and and and their portfolios. Uh. And that's pretty much in and similar to the whole index, if you will, If you're looking and so they're overweight those stocks, and then you look into the mutual fund area and they're significantly underweight. And here we're looking at large cap core managers, value managers taking a different benchmark,

and growth managers. But in terms of your core mutual fund managers, they're actually underweight those larger stocks, part because they're such a significant waiting in the market. Five stocks in the market. John this is incredibly important, this insight from Mr Costan in the comparison contrast to what we

saw with the nifty fifty zillion years ago. Just gonna some new Tom, I want to break and then we'll return back to David cost in the Prime Minister Boris Johnson holding a news conference from Downing Street at five pm local times, so midday Eastern time, Tom to talk about omicron the reporting out of the UK right now, not expecting to get new measures, expecting an update on the booster program. So one for the diary a little bit later. David, I want to come back to you

on multiples. We talked a lot about earnings has been the big surprise if this year you're talking about earning has been the big surprise for next year to potentially let's just sit on multiples for a moment. It's been some confusion around why multiples are so elevated, and want to understand what it is from your perspective. Is it that early recovery where earnings starts to deliver upside surprise, beat and raise, beat and raise, that's where Deutsche Banks

sit on the idea. Or is it the fact that rates are low and if it's rates, what does that mean for the FED and what that means for multiples going forward? Can you give me your view on that right now, David. So, we think about evaluation and an absolute metric. If you look at enterprise VEDA, sales, enterprise VADA, even the price earnings multiple, any of those metrics, the

equity valuations are extremely high. I would say the rationale for the market being reasonably attractive does depend on the extremely low interest rate environment that we have, whether that's corporate bond yields, tips UH inflation, you know, protected securities, or even nominal treasure yields, and all those interest rate

related metrics, equities look reasonably attractive. So, Jonathan, an important construct to think about is that in history, it shows six months before a FED hike six months after a FED hike that one year period. Basically you have multiples flat in every one of the tightening regimes that you've seen over time. That's been the experience, and so that

happens to match up pretty closely with calendar year twenty two. Coincidentally, you're starting now, it's about six months before the expected first hike and six months afterward, of course, put you at the end of two. That's not the forecast for a stable multiple. That's on upon which we make debate the forecast. But as a result, that's consistent with history. Where we think about it is rates are going higher, risk premium going a bit lower. Why is it a

bit lower? Consumer confidence remains high, unemployment falling, and wages are increasing. Number one and number two the policy uncertainty, our referenced earlier about tax hikes. UH, the election for next November. So once that's beyond us, you'll be basically back to a roughly stable valuation around twenty times, which is the valuation now historically high, but still reasonably attractive in a low interest rate environment, even with rates rising. David,

just brilliant. I hate to reduce the whole body of work to just an index level. Cool but fantastic on the index level through much of the last twelve months, sir, to you and the team. Gonna catch up as always, enjoyed the holidays, David. Thank you, Sir David Coasting that of Goldman Sachs. Dana Peterson now chief econnor US at the Conference Board. And what's important is our other guests focus on the unique skills of the Conference Board of

measuring American economic dynamics. Stay in a good morning. This is such an important conversation on the ability to sustain economic growth. What is the call that you have twelve months forward on real g d P. We're thinking that we're probably going to expand by around three and a half percent next year, and that's not including a build back better plan. UH. Certainly if the build back Better plan is passed, then we could potentially see growth around

four percent. So you're talking about China, like nominal GDP, we're gonna have who knows the number, six, seven, eight, nine percent top line g d P. What does that do to the conference boards Corporate America. Well, certainly that would be positive if a lot of that's driven by consumption, And certainly we're anticipating that hopefully next year that much of the services activity will return to pre pandemic levels,

or at least approach that level. And that's really going to be highly dependent upon the evolution of the pandemic, whether or not people are vaccinated, whether or not people feel comfortable getting out there and going on trips, traveling, visiting restaurants, hotels, et cetera. Danta. In about an hour, we're going to get those US retail sales for the

month of November. We expect an increase. How do you parse out the increased due to inflation from the increased due to consumers with an ever a strong pile of cash willing to spend. Sure, I think the easiest thing is just kind of take that nominal headline and deflate it by the c P I and you'll see essentially that uh, much of it's probably going to be related to price increases. But still in all our own survey suggests that consumers, even though they're a little bit dower

on the outlook, they're still willing to spend. Certainly, our holiday shopping UH survey said that people are willing to get out there and spend especially go there, go to malls, and do in person shopping. So were anticipating that that's going to show up in the retail sales today. Does it matter that they're shopping at LVMH perhaps and some

of the other luxury providers. I'm not going to go back into that, and that perhaps they're restricting some of their purchases at Target, at Walmart where you're not seeing as easy of a pass through in some of the inflation. Well, I think it really depends upon the shopper. The person who's shopping at you know, Walmart or Target may not necessarily be shopping at Louis Vuitton. UM. But certainly, UH, consumers do do have pent up savings that they've had,

certainly because we had big stimulus checks. Also, many more people are employed relative to when they were before. But certainly we're going to see more caution in terms of people looking for discounts, and certainly if we that's not delivered at the big box stores, that we're going to see weaker spending going forward. Is a general statement, what is the strength of the consumer? I have trouble with a weak consumer and a nine percent nominal GDP economy. Well,

the thing is that the consumer really isn't weak. It's just that they have soured in their opinion given the fact that inflation is high, they're still worried about COVID cases arising. We have Amicron in front of us potentially, But when we look at incomes, they're still very high. Many people are working. Our unemployment rate is at four point um. That does not signal a week consumer. It just says that maybe they're just a little bit soured right now in the environment. So how do you square

what they say and what they do? And we're talking about the University of Michigan Consumer Sentiment survey that's actually been deteriorating, a slight rebound last month, but not much. At the same time that everyone comes on and says the consumer is incredibly strong and willing to spend well, consumers may say one thing, but what they do is more important than what they do. We can find out in the retail sales and the PC data that we received later on in the month, and so far consumers

have been getting out there and they've been spending. We've got to leave with this, and cute Danny Pitterson of the conference port right now, Alan Ruskin, chief international strategist at Deutsche Bank and Allen congratulation on a trenchant note. Your note on the terminal rate? What is the terminal rate and why should J. Paul focus on it? Well, Tom, the terminal rates really seen as the peak rate for

FED funds in any particular cycle. And it's critical in this point because the markets expecting a very low terminal rate in the order about one and a half to one and three quarter percent. And if you think that the FATS peak funds rate is going to be one and a half to one in three percent, then there's no way that the tenure heeld is going to back

up particularly sharply. And if the tenure heel doesn't back up particularly sharply, then monetary conditions won't tighten very much and the equity market will prove pretty resilient as well, So all asset markets are tied together with where the terminal rate is. Your Matthew Lozerli is a lot on this. It's been one of my great themes. Good morning, David Stubs over at JP Morgan as well, Ellen Ruskin. Do we underestimate the overlay of technology engaging where the terminal

rate is or should be? Do we know the technological path of the next decade that we have to try to get to in that terminal rate? I don't think so, Tom, So I am really distinguished the terminal rate and the long term our star. So you can have a low our star that relates to the really technological change, the

natural rate of growth perhaps being lower for longer. But I think in terms of this cycle, you're fighting a particularly inflation problem and you can have a very high peak or terminal funds rate even with a long term long equilibrium our star. So I wouldn't tie those two eaches together, and I think it's very important to separate them in fact. So Allan, let's just build on that, and let's start here, because you've done some tremendous research

on this. In the last couple of months. I've been readly through it all, you talked about how unusually it is to have nominal growth as high as it is right now, and to have yields and rates where they are at the moment too. Just how unusual is that album. There's no historical precedent for nominal GDP running. It'say eleven percent, Q four and Q four, which is what we probably

will get with the GDP numbers. And uh, you know a five year tracking you know where it is currently, or you know, all rates the rate structures sub two percent in the treasury treasury market, So there really is nothing even close to this, John, which then also begs some very important questions because I think a lot of people are going to say, well, wait a minute, the old curve, which has been such a reliable signal, is going to invert shortly, and you know, watch out, guys,

in eighteen months to two years, you're gonna have a recess. I think that yield curve in general is not giving a pure signal, or you know, past historical precedent is not accurate either. Does it tell you something about how much work this FED will need to do? And this goes back to the conversation you were having with Tom

just a moment ago. There is a belief that we stop at one seventy five, that the FED funds rate will peek out there, and I sense that you're push him back against that in just the comments you had a couple of minutes ago out and what kind of number have you got in mind? You know, I pushed back it against it, you know, pretty strongly. So you know, you think in terms of a real funds rate, and historically a real funds rate peak would be nearer, say

three percent in the last cycle. And we're always fighting the last war, right, We're always thinking in terms of the last cycle that's freshest in our memories. Nominal the real funds rate went up to about zero UM. So even then, if you just took a zero real funds rate, you would have, you know, certainly a nominal funds rate to say two and a half percent, that would be almost a minimum. Now, I think the last cycle you

didn't have an inflation problem at all. I think co inflation from you know, this core PC was just above two, so the Fed wasn't fighting inflation. So in this cycle you're fighting inflation. So there's even more reason why you should actually have a much higher terminal rate. Given that, and given the fact that the yield curve has caused for a lot of people's concern, should have continued to flatten.

Do you think that the market is underestimating a discussion about balance sheet roll off in the nearer term, as that would likely affect the long end of the yield curve more quickly. But I think the market's underestimating perhaps this sort of general story that relates to taper. They're not treating taper as any sort of tightening, and I think it is some tightening because if you look at the flow of funds and you look at the role the Fed has played in financing the public sector deficit,

it has been absolutely critical. So you know, just as that taper gets accelerated and the Feds all diminishes, I think you will see term premiers start to pick up. But I think the more important story from the bond mark is less the term premius side than the risk neutral rate. I think the risk neutral rate is the thing that's going to have to go up. You know substantially that risk neutral rates is you know, essentially the

expected funds rate. Given the fact that you seem to think that the signal coming from the bond market is highly messy at best, and that it is not accurate in terms of a portrayal of the overall economy. Do you think that Jack Avlin over a Crescent Capital came on earlier and so the bond market is smart money is no longer correct, that the bond market no longer can be a signal for equities in the same way that it once was. Yeah, I think it is problematic.

I think what you've had. I think people underestimate this is said, and you don't see officials talk about this sufficiently. Is this drop of helicopter money GDPs worth of empty balances dropped into the system that essentially cut creating bubble like conditions in all asset claus is inclusive of the bond market. This liquidity is going everywhere. You know, it's going into bitcoin, it's going to equities, but it's also

doing at the bondom market. Some people talk about its excess savings, but I preferred to talk about as excess liquidity. I want to say the Fed's responsible for some of this. This is not just household savings, per say, policymakers are actually responsible for this and this was prudent policy in March of twenty but it's not prudent policy now, you know.

In November December, Allen Mr Ara de Juan at one point wanted to look south and west across the new Turkish reach that has been shattered over the last five six eight years and shattered today with new weakness in Turkish lera out of fourteen point seven four. You and I spent a story evening in Dubai waxing philosophical about emerging markets. Is that the great unknown for two thousand twenty two is all this Jerome Powell chat and what it means for for emerging markets who do not have

the degrees of freedom that America has. Yeah, I think the emerging market story is complicated, you know. I think there's a sense that if we get through the early stages of fair tightening, and particularly if the Fed does what the market expects, then the emerging market complex can trade better in the second half of two I think in the end it's still going to come around to

the story about the terminal rate. If if the terminal rate is substantially higher than what the markets priced, then then you know, em is still gonna have a hard time of it. Alan just wonderful as always in good to hear from you, sir, And I'm Ruskin at Deutsche Bank. If you are a fancy John and you go to India, you stay at the Oberoi and say you went to India. That's in Mumbai, and it's a fancy six star hotel. That that's someone John goes to when he goes to India.

Bacti insiety to something different. She is world claimed on going where others don't. And Bacti I'm not going to pronounce the names because I'll just kill it, but we are thrilled to have you here. Is you were north of the Ganges, somewhere south of Kutman. Do what does the real India look like in this pandemic? So the

real India looks like real rural America. You know this fear, high rates of unvaccinated individuals, patients coming to the hospital, confused, scared, and there's a real fear after what India lived through during the second set, that it's all about to start again and they're getting ready and getting prepared to be

able to fight the new bariant. So you got a cup of coffee with the leadership at Viser at Maderna, you and Dr Adalge will sit down with them and say, look, here's the reality of helping the rich and poor of

the unvaccinated. What is the plan to get the unvaccinated vaccinated? Twofold? Globally, the issue still is supply chain and so like improving supply chain, providing vaccines without a coastroalth life, ensuring that those vaccines that reached that last mile, that lost village is really key and that involves partnerships with government um locally and in other higher resource settings. The issues are really around anti vaccine sentiment and how do we combat

anti vaccine sentiment. And I don't think any of us thought that we'd be having this conversation twenty months into

the pandemic dr Insatia. So the India is getting prepared for the omicron variant to spread akin to what we saw in the second wave, which was terrifying by all accounts, by the images that we saw and I'm sure by the aftermath that you witnessed, what does that look like with the omicron variant based on the initial evidence that we have so luckily for us, when we're seeing in South Africa is while reinfectionist comment hospitalization as comment less

patients are requiring oxygen. Now, what we saw in this consurge in India was that a lot of patients guide from critical hypoxy and lack of oxygen access. Oxygen access in India has been significantly strengthened, but there are other policies in place, so their decrease that they're improving border control, um improving same day rapid testing prior to travel, and all of these innovations will help you know the spread of the virus and going to those rural underserved areas.

One confusion that a lot of people have, myself included, is how much less virulent the omicron variant is. We don't have concrete data showing that. But the real issue here is when does this move from a virus that we need to counter and social distance for and mask and vaccinate repeatedly, versus a common cold versus something that you're going to get every once in a while. It's not going to be fun, but you get over it,

you live, you move on. So I really try to think about what does it mean for a virus to be endemic? So scientifically, an endemic virus is one that has predictable variations, seasonal variations like the common cold, that it's impact on the health system is manageable and variable and acceptable to society. And the third is is that the number of people inviting another person is one and we're not there with COVID. We know that these surgeries

can have catastrophic consequences on the health system. We're already seeing in the United States several hospitals claim they have no more e D beds, no more ICU beds, um and our resources are outstripped. So I think what my concern is by calling this endemic, that there will be a complacency that will set it, which I think is unnecessary because still deaths that need to be avoided in our future based on the trajectory of the pandemic. When will we get to that point? After ansanti? You know,

I think as soon. Um we are now expanding vaccines. Vaccine uptake has improved in the United States in the recent weeks. We are really expecting the youngest in our society TV under five to have access to vaccines very soon. And as the virus continues to involve, we do think we'll transmissibility will increase. The virulence is unlikely to continue to increase. So I'm really saying, like next Christmas we'll have we will not be having this conversation. I will

not be on the show, I hope. Oh no, months ago we do back to you. We do scientific research here in the needle goes when you're on. So no, you'll be was we expect you to be talking about the two year yield two years back and say of Johns Hopkins, thank you so much. Away. This is the

Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations. And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom keene In. This is Bloomberg