Surveillance: Time to Buy, Says Harvey

volume cathartic puke. We were waiting for Chris. What's that? Well? First off, that's my scientific term, and typically what we see at the end of the sell off is we see volume increase, we see money moved from the weaker hands to the stronger hands. And that's exactly what we saw yesterday. Yesterday there were probably three things that we wanted to see and three things that we got. The vics at thirty nine are close to thirty nine. We

don't think that's sustainable based on the fundamentals. U two, you had small caps, I'll perform large. That's typically what you see when you you have a very aggressive hedge fund de grossing or the end of a very hedge aggressive hedge fund de grossing. And the last thing is, again, as you you point out so eloquently, that cathartic pute that we need that, that capitulation of those weaker hands, and now we can move forward. And that's exactly what.

What about the Catharsis across the x X as we seem to be doing Catharsis in a three hour span, I don't buy that. If you go back to John Maggie in a slower maybe forty four and a slower time, Catharsis took a couple of days, even a week is the new Catharsis minutes? Tom, You know, everything happens fast enough nowadays. So can we have more of a sellout? Sure we can, But yesterday was one heck of a sell off. I think every time I looked down, we

were gapping lower. Um, if you looked at some of the stories, we did hear about some edge fun liquidation, we did hear about margin calls, we did hear about some capitulation on the retail side. And I guess, as we were saying before, everything just happened a bit quicker nowadays. Okay, well it's quicker nowadays, I'll go with that. So do you do? You step in and by this morning, what does ubs suggest someone do with not ample cash, but

someone managing retail or institutional portfolio does have cash. It's one one this morning an so Lasa did the rest of the show with Alice, which let's fight say. It's what people have been waiting full for the last few years. Just what do you buying? Don't don't know what? Well? I mean, I don't know what you do? Wow, this has got off the rails. Roll past. Anyway back to our show. We think you should be buying here. Yesterday

midday we wanted to get a note out. I couldn't do it quick enough and we were looking for a ten percent pullback. We were looking for this and not break mentality to crack it. Did we checked those boxes as we talked about we we got good information on the BIX on small caps as well as our our buying or cathartic puke. And now what we want people to do is we want them to buy or higher COVID beta portfolio. We want them to buy the reopening trade.

Fundamentals are improving, the COVID wave is coming down, and what we're seeing is a pretty good opportunity, we think, to get more aggressive and play the economy. For now. We think the economy is fine, We think the FED is doing a good job, and we think the probability of stack flation has diminished greatly as a fit as a curve is flattened, as competence in the FED has

has come back. Chris, is there a high frequency data that you're looking at that really edifies this view that we're moving past the omicron wave and back to this solid growth picture that people believed in so strongly maybe three weeks ago. UM, high frequency data. We we look at the COVID cases every day. We look at them on a state by safe basis, We look at the country basis, and what you expected to see was a sharp run off, excuse me, a sharp run up and

a pretty quick or pretty quick decay. Right. We're seeing that. As far as the high frequency economic data, one of the things that we said coming into the years, we thought the consumer needed to normalize. We're beginning to see that. Um. You've seen a lot of disruption on the retail side with people not being able to come into work. I mean this weekend I tried to go to library with my son and the library was closed. Right, We'll get through that. And now more importantly, what we're looking at

is consumer balance sheets. Consumer balance sheets are quite strong, and that's a very good sign. So we'll have a hiccup, we'll have some you know, back and forth, but at the end of the day, with consumer spending being strong, with still a lot of pent up demand on the leisure and the travel side and on the service to spend side, that's where we think people are going to spend their money. I think that's where the real opportunity is.

Do you think we should leave this conversation off the podcast. I don't think this is going to work somewhere on the podcast. A little bit like a christhing christ at you buddy, pleasure, Thank you mate, thank you, thank you very much. Glenn Hobbard, you go back to our best intentions on page one twenty two. You've got JFK before assassination with great intentions. But lb J could not implement the trade assistance. He couldn't build the bridge that JFK

tried to build. That's just one example. Are we going to repeat a fractured American history? Oh? I don't think we have to. You know, the growth we celebrate always is the heads of a coin whose tails is disruption, and disruption is a demand for adaptation, and the supply could either be walls of protection or bridges like Kennedy tried to do with trade adjustment assistance. Problem is it's too small in US history that we've done it right. Lincoln did it, the land Grant colleges, FDR did it

with g I Bill. It's time to think bigger again. That's really the theme of the book. It's really about Adam Smith, a delicate call maybe about Donald Trump as well. A delicate question Dean Hubbard. Can the Republican Party get beyond trump economics and Trump certitude is defined by the wall and the bridge you'd like to build. I think both parties can get behind bridge ideas because they're about

two simple points. One is preparing people for the world that is and will be, and the others reconnecting people who get disconnected from an economy influx. That's something that doesn't have a Republican or a Democrat flavor to it, and in the past, people as disparate as former House Speaker Paul Ryan and President Obama have had many of

the ideas I talked about in the book. When one thing that sort of tying the hands of certainly both Republicans and Democrats right now and spending more money is the inflationary backdrop. How do you incur more debt at a time when there does seem to be a concern. How do you think the Federal Reserve should handle it at the meeting that begins today. Well, I think most of the programs that I advocate are actually fairly small and spending that's the shocking political thing, and I describe

ways in which we could pay for it. From the Fed's perspective, I think the Fed is behind the curve. It has acknowledged that, in a sense, it is behind the curve and is trying to catch up. The key question is not to add to demand while supply constraints find. I think the Fed now gets that the key will be communication and what Wall Street thinks then about stocks and what the economy thinks about near term growth prospects.

How high can rates go before it becomes a real problem, given how much debt has been incurred, not only by corporations but by the United States, Well, actually, not that high. You know think about it. Even if you shifted the entire term structure of interest rates up by two hundred basis points, which is hardly super high, you would have real problems in the federal budget. I think the Fed is independent. It will do what it takes to to

bring inflation under control. Think is a warning to official them in Washington that we have to take the federal budget more seriously than we have Glenn. The moment that we're in is defined by Ira Jersey at Bloomberg. Intelligence is a balancing of a rate policy and a balance sheet unwind. Let's call it QT, which is not an original thought. Are you optimistic that we can do original economics? I think it's harder than people thinking. It's certainly academically

quite possible. You can do the math and try to count in equivalent rate hikes what QT would be. The problem is QT is not just the opposite of q E. There are a lot of asymmetries built in that we don't have experience with. I think the Fed is taking this very very careful. Does that extend the X access? I mean we had this conversation earlier with a great Claudius some of Michigan talking about Michael Woodford and what

we all learned an interest in prices. Okay, great, But is a solution here for any central bank that the x axis here is much longer than any of us presume, and that they will take their time and wait for data. Well, I think the FED will certainly wait for data. How much time the FED has, of worse, depends on inflation readings and the reason for those media readings. You don't want to let inflation get ingrained into wage bargaining processes. So I think the FED could wind up moving, perhaps

even more rapidly than people think. Glenn Glenn Hubbard of Columbia. I am curious for the economics profession with the takeaway is after the FED got inflation so wrong, and it wasn't just a FED, it was pretty much everyone, how did it happen? I don't know that I would call it pretty much everyone. I think a number of economists and myself in that boat said that we're adding to demand both the FED and frankly the government to at aprement supply constraints or binding. So I think this was

a policy error that need not have happened. Okay, So if you think this is a policy error that need not have happened. Is it something that can be curtailed by aggressive FED actions such as what's being priced into the market, or do you think this has longer lasting sort of influences based on wages, based on rent prices and some of the other pressures. I do think the FED can get this under control. It has all the tools, and it has all the institutional incentives and independence to

do that. Having said that, it's hard, meaning that history isn't kind of the view that you could have this kind of FED tightening without any kind of economic or financial hiccup. So the FED is walking it tightly. Can I did this fat chances of a second time? I think so? I mean I think Chair Powell acted very vigorously in the coronavirus pandemic. I think that the bias would be towards keeping a FED chair. You think is is doing a good job absence some obvious alternatives. So

I I think so. But the only person whose opinion counts there's and I was May the president made the decision to give him a second term. The reason I asked the question is because for some people who lost a lot of credibility with this inflation code. Are you saying, Glen in your comments to Lisa, that ultimately you can win that back and win that back quite quickly. You can, but it's not without cost. It would have been better

how to policy or not been made. But yes, the FED can win this battle, but I'm afraid we all in the economy are going to pay a cost. Well, let's talk about those costs. Gland. How big do you think those costs will be? We have the discussion on this program daily. Some people say soft landing, others say it's too late, recession inevitable. How large do you think

the cost will be? I would say that the chances are better for a relatively soft landing if the FED is clear in its communication and everybody understands what is happening. The risks would be if inflationary pressures move faster than the FED things and it has to move faster and were they're bad reactions either in financial markets are frankly on the government budget. That's the tight rope I was

referring to. But yes, the FED can pull this off, so they should look through what was happening on the screens this morning yesterday threw much of the start this year glean with equities down and down hot again. Well, that, of course it's for the FED to decide. I don't think the FED should be in the business of putting a put from the stock market. The question is more

are Fed actions affecting financial stability or economic performance? Those are legitimate questions and I think they're very much on the Fed's mind in put and comments. Glen as always and really enjoy catching up with you circle. And how about that of Columbia University. It was stunning ninety days ago to CEG announced a three company breakup. It is far more stunning this morning to see General Electric really put some meat on the discussion. And the discussion is simple.

They've got two divisions, two new companies getting it done, including g Aviation, and they've got another one which they title Renewable Energy Power in Digital. We're just simply it ain't happening. Claudia sam is this industrial analyst, senior fellow at Jane Family Institute and joins us this morning. Claudia ge is a metaphor for how everyone, including your own Powell,

is dealing with the structural changes of America. How does a central bank deal with industrial failure, industrial breakup, global competition, and at the same time deal with a technological boom has seen in the excellence of ge aviation. What is an economist to do? Right? Well, good morning. I mean, these are just one of the many questions that the Federal Reserve is puzzling over right now. I mean, frankly, I would put a lot more of it on consumer demand.

But we do know that demand has been strong, and we have heard multiple times about the production, particularly of goods, not making up for the demand. We have basically anything that's bad news on that front, whether it's COVID or problems in the production sector. I mean, this is not good news. But if you step back and look at big picture industrial production and a lot of the consumer good spaces, it looks a lot better now and it

did even months ago. This is not saying much, but you know, we need anything moving in the right direction here. If corporations are clearing markets, including getting rid of the debris, as General Electric is doing, do we assume consumer demand

and the buoyant consumer demand is legitimate and sustainable. Yeah. So, having worked on consumer demand for over a decade at the Federal Reserve, I know that the biggest thing driving demand is in common people's pockets, and we have seen, particularly from the federal government letting child tax credit expire, seeing millions of workers be out of work even five

days like that. A lot of families cannot make that work, and certainly are going to make it work and go out and buy a big, durable purchases that you know they can put off a little while. So I think we've seen a lot and will see when we have the January numbers that's done more than a FED increase

is going to do in terms of pulling the demand out. Claudia, there is a conflation in between fiscal and monetary policy often, and people look to monetary policy to do a lot of things that fiscal policy have done years and years ago.

I am wondering at this point, given the sense that you've long called for the FED to be patient, you think that they're on track, they're not behind the curve, At what point do you see the inflation mandate becoming pressing and important for them to address at a time when it seems unclear what more they can do on the employment front. Right, So, I know the narrative is really gloom and doom right now, but we gotta step back. We had unemployment moved below four percent at the end

of last year. Yes, we have had inflation, but we have inflation adjusted because sumer spending, business investment, you name it. This is not stagflation. And fiscal and monetary policy really push that. And that's that is so important. It is absolutely appropriate. And we've seen this in messaging from j Powell and lay Layo Brainerd. We are so much closer on the maximum employment and yeah, the thing that's you know,

not where we wanted to be as inflation. So I don't think they've changed how they are valuing or kind of waiting the two. It's just we're a lot close to the finish unemployment and that's a big deal for American family. Although participation rate has not gotten back up, and this is something that people are concerned about. And given that, and given that it may not recover two pre pandemic levels, people are starting to worry about a

wage spiral. How are you thinking about that? Yeah, so we have to remember the two things that push up on prices or supply and demand, right, and consumers aren't out demanding and omicrons taken the ends out of some of the service sector. Well, if the demands not there

from the consumers in there from the employers either. So I do think when we get the numbers for the fourth quarter, they good employment compensation index numbers, We're gonna see some pretty big numbers in December, unfortunately for the FED. And this is for markets to the information that we really need to understand where demand is going is January and we're not going to We do not have your right now, you know, we're data dependent, waiting out for

the data. Claudia. A lot of good analysis into this FED meeting, and one of them is Kit Jukes. There is a society general with decades of experience of linking in the dollar into other markets as well. Mr Jukes this morning suggests that the FED can slow demand, Can any central bank slow demand? Absolutely? Again, I think the fiscal support income out of people's pockets COVID is wreaking havoc right like that is the big straightforward effect on demand.

But the FED does have an effect on the borrowing costs of consumers. Now the tenure Treasury is not moving in a way that's really helping them push on those costs. But in a world without the FED moving right like, the FED can make it more expensive and can take particularly the durable goods which consumers often need to borrow to make it happen. Yes, the FED can bring demand cool it off some Uh, that's that is what's happening.

It's sad because the real way to fix inflation. And J. Pau said this is to get us out of the pandemic. But I think, frankly, listening to President Biden last week, this is not going to happen. So the FED is going to have to cool off demand. Claudian, an unfair question. And this goes to fancy mathematics which gives us beautiful curves that we never read in Michael Woodford's book on Interesting Prices, and there are oil functions. I don't want to go into it. What I do want to say, Claudia,

is there's all sorts of lovely curves. Is get us back to an inflation rate? Where is your image of where that new inflation rate is? Is it two percent? Is it adam posens three new inflation rate? Or is it a number that's higher but not frightening? Where? Where? Where does inflation settle out? Ad on the glide path? Yeah, so first of all, I just say every single one of my forecasts about where inflation is headed, and this

has been true now the entire pandemic. Is when the pandemic moves into an endemic and we really have this under control, then when that happens, we're talking another six months of getting us back to something that's really close to two percent. The longer this goes on, the harder the more backup we have, the more things have gone haywire. But the fundamentals in the US economy are not notably worse.

And that's a lot of the response last year is just we have this other factor that is, until the pandemic is under control, we are going to see well above two percent something, not seven. If the Change Family Institute, I think we all hope it's not going to be seven. Clodia, thank you for joining us right now, and this is up Lisa ramots As weel so I'm gonna ask one question and get out of the way. Winnie Caesar joins us from Credit Sites. She was with Wells Fargo for years,

global head of credit Strategy at Credit Sites. And what's absolutely fascinating here is the dynamics and the things we can learn from the credit market, and particularly high yield. There is this phrase Winnie yield to worst. We have yield to worsened out, worser now And as you say in your lovely research note, there's a point where you step in and buy the price for yields to come down or yield to worse to come down? Are the Are we there at this moment? We are just about there.

We had been telling investors that five percent yields worst for high yield was the level that we up was much more attractive, and we got there yesterday with the market volatility that we saw. Now, how yields off to a pretty rocky start to start the year. This is actually the worst January performance on record at this point, worth than two thousand sixteen. Commodity sell off worse than

two eight as well. But we think at this point, given the amount of cash that still fits on the sidelines and the need to generate some income in this inflationary environment, five percent on HW yield doesn't look too shabby. Let's take a step back and talk about the credit markets is an important functioning tool that the Federal Reserve looks at. They're not going to get that concerned about the stock market sell off. If you see the fixed

income market, in particular credit behaving. You talk about that five percent level for yield to worse, But if you look at credit spreads, the extra premium that investors charge of our benchmark rates, it stayed incredibly tame for the riskiest securities. What's the message that you get from that? The that so that we get from that is that investors should consider continue to expect a very low default environment this year. Nobody has expected economic growth to really

roll over quite yet. And with that, borrowing conditions in the credit markets have remained pretty favorable to issuers, which means that companies are going to continue to enjoy access to liquidity at levels that are still very attractive relative to historic norms, despite the fact that we've seen yields

move higher overall. So the strice action that we've seen in the credit markets has been much more collateral damage from equity and rates volatility rather than the credit markets sending a signal that liquidity is really drying up across the financial markets, and we view that as generally constructive. So we need fast forward and talk about what this means two years from now, three years from now, as rates are expected to continue to rise and become more normal,

whatever that means. At point does that become a serious problem given the trillion dollars of corporate death that have been issued over the past couple of years. So there is a point where we'll reach this kind of tipping point where borrowing costs very much exceed what issuers can ultimately pay. Especially as you point out debt loads have increased pretty significantly, we're still a far cry away from that.

With investment grade yielding about two point seven percent, we're still a hundred basis points below the average coupon on the index, and that average coupon is an all time load, So you still have at least a hundred basis points just to get back to that average level. And so long as we keep growth good enough for credit, as we like to say, then issuers should be able to

continue to operate pretty nicely. When I saw a blurb the other day, I didn't even read the whole thing, folks, It was just in the blur of the moment where it was trying to calculate how much of a debt deal Microsoft could do. Now, Microsoft is the antithesis of your world, I believe they're triple A. There as far from high yield as you can get. When you hear the ability of any company in your world or in the technology world to raise ten twenty thirty billion dollars,

how do you respond to that size of number. Well, those sizes of numbers have actually become much more normal to investors over the past few years, where we've seen more and more jumbload deals, both in the investment grade markets and also in leverage finance. As high yield and leverage loans have grown, issuers have a lot of avenues

to raise very large trenches. I'd also like to point out there there is still an awful lot of cash on corporate balance sheets that needs to be used for something, and companies like Microsoft and other very highly rated technic bology companies are some of the issuers that have the

most cash balances. So I'd be a little bit less focused on the size of kind of jumbo transactions that can get pushed through in the investment grade market, whereas the high yield and leverage loan market are really primed for these massive LBO type issuances over the course of this year. Interesting when he thank you an impotent pound of the cross, as that story with Whinnie says of credit size, what do you do against a reported one

thousand troops of Russia. We go to Alex Brudeaux, who gave us a lot of smarts early in the year with the Eurasia Group risks for the year. We're thrilled he could visit with us again on his expertise of Russia and Ukraine. Alex, I am thunderstruck at the granularity of Eastern troops. Thank Vladivostock taking the Trans Siberian Railway all the way over to Belarus. You don't do that unless it's for a reason. Why does Mr Putin have

East Stern troops in Belarus threatening Kiev. But we have seen other signs of that happening as well over the last few months. Troops coming from Siberia as another example of this, and it does point to a build up

on the Russia Ukraine border. We now have some of these troops heading to Yellow ris for these military exercises, and I think that is another part of the pressure that's being put not just on the Ukrainians, but also on NATO and the US to come to some terms on demands of the Russians made back in December UH to UH that they want a ban on Ukraine's membership and NATO, they want other concessions coming from NATO in terms of troops deployments in Eastern Europe. This is, you know,

not just about Ukrainie. It's also about the threat that Putin perceives coming from the US and NATO on Russia's western border. Is the threat cultural? Is that the westernization of the Ukraine. I think that Ukraine's turned to the West, particularly it's turned to Europe economically and then to Europe in the US on the security front is of concern

to the Kremlin. Historically, Ukraine had been very close obviously, not just I mean when we're talking post independence, there had been very close relationships between Ukraine and Russia, and after in particular, we saw that really decline. It is in many ways a very different relationship now because of the conflict of the last eight years, because of economic changes in terms of Ukraine's orientation. Uh Putin has been pushing against that over the last several months and sees

that as a problem. But I think the security issues really have come up in the last couple of months as being the priority for the Kremlin and the thing that they want the US and NATO to make confessions. Alex, I know you don't have a crystal ball, but if you could game out what you think is likely to happen over the next few weeks, what would you say. Well, I do think that diplomacy has a real chance here.

In fact, we think that it probably will in the end lead to some level of the escalation in the coming months. But this is gonna be a real challenge seeing all of the escalation and and and posturing that we've seen just in the last ten days or so after the first round of talks really did not go well between Russia and the West. But there are still areas where Russia and the US in particular can have discussions, including on these issues of NATO's presence in Eastern Europe,

including issues like missile deployments, UH, nuclear weapons. UH. There's a whole host of things that Putin wants to talk about, particularly he wants to talk about them with President Biden, and things that that a deal could be struck. So there is this room for progress over the next several weeks, but it is going to be slow going. And is going to be hurt to a certain degree by the

escalations that we've seen over the last few days. Alex, How concerning is it from your perspective that China in Russia are increasingly teaming up at a time when the US is trying to regain its status with the European Union as the alliance. Well, I think that it is a concern certainly for Washington to see sort of this

this close relationship. You know. I would say that the Russia China relationship, it's gotten better over the last several years on a number of fronts, particularly economic, but now increasingly on the security side. I think it's unlikely that we're going to see, you know, a formal strategic alliance where one of them comes to the defense of the other in the case of a major conflict, but they

will give each other a certain level of support. Uh And in this particular case, I think, you know, the Russians in particular, I have been sort of that they've appreciated the fact that the Chinese government has sort of given a nod towards some of the Russia's security concerns when it comes to the U S and NATO. I'm gonna leave it. The ratis Thank you, sir, As always sound expert there if you write you. This is the

Bloomberg Surveying 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