Surveillance: U.S. Inflation Picture with Saravelos

and of course on the Bloomberg terminal. As far as I'm concerned, this is the domestic In the Finance Interview of the day, George Saravellos has been brilliant feeding in all of David folkers Landau's research at Deutsche Bank into foreign exchange research, and this morning an absolutely brilliant tour to force paragraph from Sarah Bellois. Let's go to it right now. And you know this, folks, the real wage it ain't happening. Real wages at negative two percent are

the weakest since two thousand and eight. This is very different from the inflationary environment of the nineteen seventies when real rages were growing sharply. This is leading to a very different message. The consumer is defferring as opposed to accelerating consumption like in the nineties seventies. We're gonna try Mr Sarah Ellis now as we wait for the Secretary of State, George, you're more important than Anthony Blincoln. But

let's try this as we can. You take a starkly different view on what inflation will do to our economies. Where will we be in April or may? Thank you Tom. I think if you look back through various commentary, UM, we constantly try to find parallels. Is this two thousand and eight, is this een? And I think the reality is this is twenty two and it's just very, very different to anything we've seen before. And part of that is the inflation picture you allude to, and what you're

seeing in the US now is pretty remarkable. US real disposable income is below its pre COVID trend, so everyone is very focused these excess savings. But in terms of future expectations for income, UM, they're going down. You have a story of supply that is frankly terrible. The labor market is shrinking for the first time since World War Two, and you exclude durable goods, you haven't had capex. So I take issue with this idea that it's all about

strong demand, booming demand. That's why the Fed's hiking. The FED shore will have to hike but there's also bad things happening in the background. And I guess the last point to make is if you look at the starting point of inflation, we're talking about a totally different environment to the last thirty years. The last few hiking cycles have always started with inflation at or below target UM. So this idea that somehow the FED can maintain easy

financial conditions, keep things nice and smooth. That was the policy objective in the last hiking cycles because inflation wasn't as high. And again this is a very different environment and a very very unique one, so to speak. Well, during to that point, there is an idea embedded in your words where they're FED has to tighten policy in order to keep the economy from slowing down more because of this restrictive inflation that you talk about from the

negative real wages. Can you talk about how they might try to orchestrate a soft landing or whether you think it's too late. Well, this is really the big question. Can the soft landing be orchestrated? And I think that's precisely the worry of two. It's going to be the stage of the cycle we're in. Will we be able to stay mid cycle or are we going into a

more late cycle environment. Um, I think that the jury is still out, but what we can say for sure, it's just going to be much more challenging than last year, where if you look at real yields, you know they made record lows back in October November. So this is

a very fresh story. I guess the last point to make is if you look at the fixed income market, yes, we have to reprice more for the FED in the near term to bring inflation down, but more medium the rate market has for six nine months been giving you this message that neutral rates trend growth has issues, and I think if this continues, what you will see as an aggressively flattening curve. Potentially the curve can invert because

essentially the FED has to hike rate. The purpose of hiking those rates is to bring long forwards down, it's to bring inflation expectations down, and at the end of the day, that's actually positive for the long end of

the fixed income market. So, George, give us a sense of what you would say to people who point the labor market and say it's incredibly tight and sure, maybe real wages are negative, but they're going to go up because you're going to see a rolling over in the inflation, and you're going to see wages continue to accelerate, as we've seen in some of the earnings reports that have come out so far. What would you respond to that? So I very much agree with the phrase that the

labor market is tight. I very much disagree with the phrase that the labor market it is strong. The labor market would have been strong if U S employment had recovered back to where it was a pre COVID trend. The Australian labor market is strong, the Canadian labor market is strong. The U S market is weak. And that's exactly what is creating this wage pressure. You don't have

enough work is coming back in. It's shrinking at the fastest pace in many, many decades, and I think that's precisely what's going to create the issue for the FED. Wages maybe going up, but it's it's essentially for bad reasons, and it ultimately means the speed limb of the economy

is slower than what's assumed. If you're joining us on Bloomberg Radio and Bloomberg Television, George sarave ellis where us with Deutsche Bank an important conversation and the state of our economics, financial investment, John Farrell, Lisa Bramwerts, and I, oh wait the press conference of the Secretary of State in Geneva after we heard from Mr Lavrov earlier George Saravellis, I want to go on Peter Hooper and you right now. My criticism is a static analysis that's out there right now.

You and your team are wonderfully dynamic. Which part of the dynamic continuum of the I S l M structure matters right now? I think for the market at the moment, it's really all about the speed of this expected inflation slow down. If you look at the current inflation COREPC around four percent, it's expected to go down onto a two handle. So any deceleration that's not as fast as

that will create pressure on the FED UM. The key question really is how that interacts into into a slowing economy um and again that has the potential to impact all asset classes, equity markets of course the dollar. But the big question for this year for me is really are we mid cycle or are we late cycle? And I worry we are in late cite in the late cycle situation, the end is near sounds like Bramo everything does.

I'm loving this. I honestly kind s. It's fascinating and I have to say that it makes a lot of sense and it goes against a narrative that we've heard continually. So thank you. I appreciate it. Utsche Bank, Mike in Laser ram it's happy this morning, I George, thank you, just wonderful right now with an extremely sharp note. And there's always at Wells Fargo putting the timeline on that. Their senior economist Sarah House joins us, Sarah, I want

to go to the certitude of March. Let's take it from one J Caesar, beware the rate hikes of March. Are we going to see in the literature this weekend? Are we going to see in the work of economists next week a beginning of an adjustment to what's going to occur in March? I think we've already seen it move that way, so both in terms of market pricing, but also I think a lot of economists calls, and I think that will be the big theme of next week SPED meeting, is what they're doing to just signal

not just the timing of liftoff. But I think increasingly we're going to see more attention, and I think really a lot of word parsing in terms of what the pace looks like. So is it going to be roughly that twenty five basis points per quarter pace like we saw last cycle, or could we actually see something a little bit more aggressive, whether that's back to back meetings or potentially, as there's been some rumblings, even a fifty basis point move coming out of the Gate question I've

asked a couple of times this week. Let me rephrase it to you. It's simple, why can't they come out and say we're in a pandemic, we have massive uncertainty, including the diplomatic events in Geneva. We're gonna go twenty five beeps and then sit? Why can't they say that? So I think when you step back and you look at the overall state of the economy, so even as we're in a pandemic, we're still seeing an extraordinarily strong picture.

So labor markets are are quite solid right now. So of course unemployment already below four percent, and I think when we look at where policy is, it still actually accommodative. And it's hard to sit when you have seven percent CPI numbers. It's it's hard for the Fed to to stand idly by the optics on that don't look good.

The optics on that don't look good. The reality of it is actually incredibly nuances George Saravellos of Deutsche BEG because Thomas Mentioning earlier talked about in his note this morning, this idea that the inflation that we're seeing could be contractionary in its own right, that if the Fed doesn't act, that actually the economy was slow much more than people are certainly expecting. Later on, how much are you seeing people not spend because they are concerned about how high

prices have gone? So I think we've certainly seen that and some of the buying plans for some big ticket purchases. So if you look at the Michigan survey, you've seen the buying plans for homes, autos, large household durables and absolutely cratered. And when you dig into the reasons for that, it's it's not so much households being worried about their home finances. It's just a sheer uh, It's just a

sheer price. And so I think we are seeing this inflation cannibalize some of those sales, and I think it is one of the factors that's leading us to expect a much more trend like pace of of consumer spending this year, which is going to offer some relief on on the inflation picture, but it's going to be more towards the back half of the year. And even then, I think we're still looking at an environment of inflation

well above where the FED wants it to be. And meanwhile the nature of this inflation is becoming more politically perilous, with the lowest income or workers who originally enjoyed the biggest wage gains starting to see there's fall behind on a percentage basis are relative to the highest earners you're seeing So, for example, bank employees with massive gains in their salaries, how much does this change the narrative in a significant way and push the FED to move faster?

Because right now we are back in a scenario where the top brackets are are benefiting the most, right so I think this is this is an important element. So we focused a lot on the labor market being broader and more inclusive over the last cycle, but I think when we look at the current environment and the current state of inflation. So grocery store prices rising the most in thirteen years, same as energy housing costs when you factor in those those utilities also up, you know, by

the most we've seen since the early nights nineties. This disproportionately affects through lower income households, and so I think there there is something to be said for the FED tackling this and inflation, making sure that it doesn't become an entrenched try to half to tighten policy even further down the road that actually has disproportionate benefits to lower income households that don't have as much room to to

hedge around the entire prices. They don't have the savings to dip in to the same extent as as higher income households as as well. Okay, let's go back to the great John Sylvia who developed Wells Fargo and you people have continued it forward. Sarah House, what are real wages doing? I don't mean so much the real wage, but what does the real paycheck do? Here? The inflation adjusted paycheck, right, so in terms of real average early earning, so we've seen them turn deeply negative over over the

past year. Now, I think we'll see some improvement in that dynamic as as the year moves forward. So we're expecting stronger wage growth as we do see the labor market continuing to tighten and businesses have come around to the fact that if they want to attract and retain workers, they have to pay up. That was a lesson that was hard to learn the past. The past could go away from hourly wages. You sound like an economist. Go

to somebody that's a house. Somebody's making one forty, the other person is making one twenty or ninety or one eighty whatever, but bundled all in there doing a tax form of one fifty or two hundred thousand. That's not an average aly wage. But they're getting closed by inflation. Are they going to be able to keep up that upper middle class household that everyone aspires to. Are they going to be able to keep up in the next

twenty four months. I don't see it. I think the pictures actually going to look better when we talk about some of these stronger wage gains, not just in those lower income, high contact service sectors like leisure in hospitality that we've seen, as we do see wage pressures filter up into too higher pain brackets as well, and then the fact that we are expecting inflation to receive over the course of that year, so that balance is going

to get a little bit better. And I think when we talk about overall household income, we have to remember that we're also adding a lot of jobs this year, and so that's going to help in terms of that aggregate wage and salary income. That's going to help offset some of this. These inflationary pressures that that household are seen as we see more people step back into the labor market and you go back to more to income

household Sarah before we let you go. The feed is increasingly moving to a data dependency, as they keep saying, and there's a lot of people in the market seem to believe. The question is which data? So what is the most important data that you're watching in the weeks and months to come. I think your term it boils down to inflation. So we are under the assumption that employment is going to hit near pocket here in January and February with amicron staffing apps and absences, difficulty staffing

up and bringing on new workers. But I think it really comes down to how quickly or whether at all, we do see those inflation pressures begin to recede. So we expect inflation on your rear basis to talk out here in the first quarter. But on a monthly basis, we're still gonna be seen some pretty strong games here in the near term. And so I think it's a matter of of how much some of those monthly games

come down. If we're still seeing you know, three times four times of we're sent monthly increases, I think that's still going to keep the pressure very much on the feed into um signal that they are are closely trying, closely tracking inflation and trying to rein that in before it becomes to entrenched. So the House of Los Franco, Sarah, thank you. Now your level joins us right now, senior

US equity strategists at an optimistic you. Yes, Now you frame what you have changed in the first twenty one days of January. How have you amended and adjusted the U B S view? You know, we haven't changed our view much. Clearly, the market has had a choppy start to the year, but it does feel like most of the selling might be behind as we're approaching some clean technical support level on the SMP and that would suggest

that the market is near over soul territory. So we are looking forward for this narrative to change and some stability in the market going forward. I think that UM investors have become somewhat spoiled in the last couple of years, have not seen any sort of pullback to this magnetude. Usually you see a couple of these five percent pullbacks. So we're starting to see that market approach out oversells territory and really opportunity to start thinking about buying those deeps.

And now that you've heard these phrases in the past, don't catch a falling knife. Remember covering the European debt crisis, a decadeed guy I was told, don't be your hand in a food blender. When it feels uncomfortable, that's when you should buy. How uncomfortable is it now? You said, buy the dip on the s and pay. Would you buy the tip on this last one? We have been

somewhat usual on tech for some time. We do think that tech will continue to pray some pressure from rising interest rate and uh, those valuation needs to come in a little bit more. There are areas of tacto that we do like, and we'll use the opportunity that's happening that this sort of indiscriminate selling to build opportunity position over the long term, particularly in areas like artificial intelligence, big data, cybersecurity. So there's some opportunity here to build

position and high quality names was sustainable business models. Do you think that the market's got in ahead of itself with fat expectations? Oh, we we do. We do think so. In terms of our base case is that we expect three great heights this year started in March, followed by June and September. We're looking for a balance sheet role run off to start later this year. I mean, what's driving our view is that we continue to believe that

inflation will meaningfully moderate as the year progress. We're looking for our to two percent by the end of the year, and we think that will alleviate some of the pressure on the feed to be more aggressive. Uh and it needs to bring back a modnteler policy to neutral. The reason why I ask is because you expect or you call for your your your firm calls for three rate hikes this year versus the four that are baked into market expectations, and I wonder at what point you start

to see tech becoming a buyo. We're just talking about how you're not there yet. It's neutral, but what is the tipping point for you to say, Okay, now is the time to really go overweight and to go all in. I think you know what you need to see is one while we're watching the earnest season very closely, and so you know, if the tech companies can put up good numbers, which traditionally they have been able to do.

So I think if you've got another you know, five or so pulled back here in tech, it becomes a little bit more attractive. But right now we are really focused on taking advantage of value. We think the value continued to be well positioned, particularly as rates move higher. Financials well so looking at energy given that the continue upward pressure that we have seen on all prices, and we think that prices were stabilized at a higher level, and so we think that energy is also some of

the best opportunities right now in the market. Nadia, I am and this is my own bias, folks. Full disclosure, I'm absolutely fascinated at the comparison of Microsoft using spare change to go after activision versus the travails of Netflix. I don't want to do individual stock here, but what's the value of profit right now? What is the value of free cash flow right now? You know, having good profit growth and also having a strong balance sheet and free cash flow can be a very powerful currency in

this market. As you're seeing valuation pull in and some of these tech companies, it is providing opportunities for pick up and m and A, which is already playing out early in the year. And so we do think that that is very valuable. A lot of these tech companies large colganies of flashbord cash, and we wouldn't be surprised to see even more m andy app activity later this year. And nowda, how does the international story stack up now versus the US. I've heard so many people throw around

names like Japan. Maybe take a look at China as they start at as how did they stack up against the US at the moment? Yeah, we we we we do. We do have a preference to the US. I mean in terms of looking overseas like your your zone looks interesting, Um, China, We're still mutual on China, but the market has re rated down work quite a bit. Over the last year, and there might be some opportunities there in incoming weeks around around China, but right now we are utual on China,

not your level of us, Nadia, thank you. Our goal is to bring you experts, people with zero bs about the things at the moment, and we've hit a home run out of the park here over the Massachusetts Turnpike with Tina Ford, head of Global Political Strategy at Avon Hurst where their academics at Colombia and far more her ability to trapes across the Atlantic like no one I know. Tina thrilled to have you on at this historic moment. Secretary B. Lincoln's family is steeped in Eastern Europe, steeped

in this fractious relationship between Russia and the West. I featured that John Meersheimer real politic moments ago, the idea that NATO is overreached. How does the President of the United States react to Mr Putin's belief that we have overreached? President needs to hold the line and Secretary B. Lincoln, um, as you said, with his family history in Eastern Europe, just like Angela Merkel, the former German Chancellor, knows that

you cannot show weakness to Vladimir Putin. Blurring the red lines dividing the West in NATO is part of what's happening here. How do we show strength away from sanctions? What are the avenues we have east of Kiev. Well, whilst we've all been busy with COVID fighting, COVID and and everything else, Russia has been able to make significant

inroads in destabilizing UM. It's a former UM, former satellite states Lithuania for example, UM Belarus with the with the protests and the support that's come from Moscow, also support from from Moscow to to some current EU member states. UM. That is why To those who ask you know why now, I would say, We've got US midterms in November, as as as all Americans now, we've got a new government in Germany. We have the UK focused on its own trouble.

So if there was ever a time to test the resolve of Europe and the United States when it comes to enforcing borders and and other measures, now is that time.

I think the question that you know, to refer back to what you're saying, is whether the sanctions that have been suggested, these massive sanctions, the sanctions from Hell are going to be enough to deter putin who might be thinking, Um, that we won't be willing to do the big stuff like take you know, sanction Russia against Swift for example. You know, there may be other lessons so that we can take from some of these meetings, in particular the

relationship between the United States and the European Union. Is it significant that Anthony Blinken went first to meet with all Off Schultz and that he really emphasized everything that he said, We will work with our allies. We have decided on a plan. This is ours. Is that notable and frankly a notable departure from the previous administration and enough to create a strong coalition. Well, you're right that it's um, you know, making more of an effort, more

of an effort coming from Washington than usual. But I can tell you that when those US Russia bilateral meetings were announced in for Geneva, the Europeans were very concerned about decisions being taken about Europe without Europe in the room. Since then, Tony Blncoln has been at pains to emphasize

the importance. But you know, speaking to you from from here in London, Um, there is a lot plenty of reason to be concerned that the failure of this diplomatic initiative is going to lead to a serious gas price crunch in Europe, or a gas supply crunch rather and a price hike. And of course Ukraine is also important as an agricultural producer, so we feel the effects here in a way that is perhaps more real politique for

the United States, Tina. If you are advising big multinational companies about how to prepare for some sort of escalation here, what would you say, what mindset should they get in as they prepare for either sanctions or even some military altercation. Well, I do advise multinational companies and institutional investors. That's exactly what I what I do as the chief global political strategist. And one of the things that I have emphasized in my methodology is that we cannot treat these types of

events as tail risks. Um. Nobody needs a geopolitical analysts who cries wolf all the time, and so as a longstanding Russia watched her. You know, I'm saying now, Um, that this conflict is entering very serious territory. You need to stress test against Um. You know, waking up to a headline that says Russia has crossed the border into Ukraine. Now, in addition to that, there are some, perhaps less destabilizing but still concerning possibilities, for example, a de facto or

a soft annexation of parts of Ukrainian territory. And let's remember we've got troops, Russian troops now stationed in Belarus in addition to those amassed on the border with Ukraine. Tina, Peter the Great, I know you know this, or for forty two years, I should say, reigned for forty two years. Mr Putin is catching up very quickly. Let's look at Putin the Great in the heart of the matter, which is the Russian people have always project itself to the waters.

They need a navy. It's been that way forever and ever explained to us Mr Putin's feelings of Ukraine is an avenue to Crimea is an avenue to the Black Sea. And how the U. S. Navy and NATO should respond, Well, you know, I love what you're saying. I lived in St. Petersburg for for a time in uh you know, a million years ago in my student days. Um it was um frozen. So for you know, half the year and so didn't have direct access to the water. U The

Russian Empire, of course, came before the Soviet Union. Having those um, those channels has has always been important. Putin does see himself very much in in one of Russia's great leaders, um, alongside the Czars. He's written extensively about this. UM. But if we take what's happened in Kazakhstan, for example, in context, Putin's dream of having a kind of safe pro Russian buffer states all along the border is starting to crack. Um. The Mersheimer quote that you put up,

you know, interested me very much, of course. Um, you know, one of the most important professors of international affairs and leaders on this. What mir Scheimer says that perhaps NATO has overreached is echoed by a lot of the investors I talked to. Why are we doing this? Why are we, you know, poking the bear. Here's where we bring in US diplomatic history. Um that says the United States can't

allow any regional hegemons. And that's where what happens in Ukraine is watched very closely in China and by Taiwan, right because both China have a big thing in common and that is wanting to to to be the regional head and months without risking US or Western military blowback. And of course that worries all of the smaller countries around them. So will the US be able to maintain

its global position. That's what's at stake right now in Ukraine, and that's what Secretary Li Lincoln is going to be trying to um to project Tina. Thank you. I think that final point is so so important. Tina foldom that of Aimon huss 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 and this is Bloomberg. You do