Surveillance: U.S. Inflation Surge

to go over this one. Your reaction place. Yeah, John, Well, it did come in a touch higher than expect it and does it change things materially? I think it just keeps um pressure on the Federal Reserve UM. This is a very difficult spot for them where seeing if play should run far above you know, what they expected in

the target UM. And yes, there's some signs that maybe we'll get easy in the head line number right going forward in energy prices, but still the core number, when I'm looking at a half a percent almost five percent year and year before that is is definitely gonna keep the heat on the FED. How much can it rise and how much do you need it to fall for the Fed to feel like things are under control. Well, our view is that, um, it's going to continue to

stay hot and sticky through the first quarter. UM, and you're not going to really get some reprieve until you know the second quarter. But even then it's going to remain elevated. UM. I think if you see moderation, if you do see the year and year rate, let's say, gap down a full percentage point or so, it looks that way into two, then the Fed can take a

little comfort there and maybe wait a bit. But it's certainly gonna be difficult because we're seeing more and more the FED members becoming a bit more worried right about inflation and less so about the labor market. What do you think is appropriate then? If it does remain hot and sticky, as you've been saying through the first quarter, what's appropriate in terms of Fed action, Well, we think

they should be patient. It's gonna be difficult, but we do think they're gonna be need to be patient because the mix of things you're seeing growth likely to decelerate now fourth quarter nearly eight percent, so very hot economy as well, but we think it's gonna slow in Q one, and don't forget that we have this upsurge in COVID which is going to hurt the economy. Um, and we have to see how that affects inflation. But if we're right and inflation comes down, should give the Fed a

little bit of patients. But we still see them you know, raising rates. You know, later than September this year, are we going to start seeing more material wage inflation to keep up with the actual inflation that we're seeing. Well, that that is the critical point to focus on. Frankly, Um, if you start to see wages rise because workers say, we're paying a lot more for items of goods and

services and we need higher wages. And if companies accommodate that, then we get into that par ice wage spiral that we've you know, watching and everyone's um concerned about. But right now we're not quite at that point. Um. We have to wait and see. Unfortunately, see the data, um indications are right now for us is that the labor force participation rates rising. Right, people are being pulled back into the labor force. If supply comes on, that helps

temper some of the wage games. Well, And a lot of the reason when I've spoken to other economists that I say, how can consumption still be hanging in there when consumers are being faced with this kind of inflation, when you're not getting the commensurate wage increases. Is that there is a ton of savings that have been built up over the course of the pandemic. Those are starting

to be drawn down. Now. Is there a risk that the inflation persists beyond where those savings are going to last and we start to see a serious hit to consumption? That's right, um, you know, and and most of the the you know, over two trillion of savings is really excused Tom, high income household. So, um, we're gonna wear down the bill, the propensity for consumers to suspend, and that should be you know, helped put the brakes on inflation, absolutely, Kathy,

just quickly, then let's round this one out. Are you confident this morning, confident enough to say that this is as high as it gets, This is as bad as it gets. We think it gets a little worse. Unfortunately, the year and year rate, we don't really see that peaking, especially the core until maybe February, so we've had a little bit more upward thrust there and especially on the

service side. Right, and again I look at the numbers core commodities, core goods nine point four percent year and year Core services though, are three point four that's also putting up with pressure. Kathy, just wonderful, Kathy Bostick that of Oxford Economics, after getting the fastest reading the CPI print. Going back to two and we've been talking all morning with people who are saying inflation is a scary thing.

It is a scary thing for asset valuations. It is a scary thing for the Federal Reserve, it is a scary thing for politicians hoping to get reelected. And Stephen Dover has a message for that, maybe it's a good thing. He is Franklin Templeton Chief market strategist and head of Franklin Templeton Investment Institute. Please explain, Steven, how we can take a look at this consumer consumer price increase and

really see what equities are seeing, which is brighter skies. Well, when we look at it, I'm not really arguing that inflation is a good thing. I'm arguing that inflation is a signal um and that inflation is a plural, and that there's a lot of different ways we can look

at inflation. So what can we learn from these inflation numbers, and how does that help us when we're making our investment decisions, And this inflation is very is going We are in an economy right now that is being reshaped, and we're not going to go back to where we were in two thousand and nineteen. It's going to look different as we go forward. And part of the signaling that's going to change our economy and help us reconfigure

it going forward are these inflation numbers. So what's coming out of these inflation numbers is that we clearly need more workers, we need to increase our productivity, that we're having a shift in where our economy is hot or not. If we look under the hood on these numbers, we'll see that inflation is much higher, for example, in the Midwest in places where people are moving um as they

work from home. As as our economy changes, um that we're going to need more capex, which looks like it's going to happen to increase productivity, companies are going to have to look If we're looking at increases in labor costs going forward, which we almost certainly are, companies are going to have to look at ways to increase productivity. Cap X is likely to increase. So all that thaying that UM, yes, UM, we've had a miss in terms

of inflation has been higher than it is. But let's look at it from what it signals a perspective and where we have opportunities. And so, like you said, if you know companies are going to face labor cost rushers, they certainly already have. You know, if they're going to need to increase cap X, how do you translate that into a portfolio? I mean, does that lend itself to

large caps or how do you view that? You have to look at companies that are able to transition their pricing through UM ultimately to the customer and so keep their profit margins up. I think that we're in a very interesting place for the equities market right now in that UM companies seem to be able to pass through their prices because interest rates, despite this inflation number, haven't risen. So it's a little bit of a goldilocks UM place

for stocks right now. We have earnings growth that earnings growth in other inflationary periods, and we look back, you know where inflation was this high before forty years ago, rates were also very high, and that offset UM that offset the earnings because companies had to pay higher rates, but that's not happening right now. Have low rates, they're not they're not hurt even by a modestly rising bond market.

So that's generally positive for equities, particularly those equities that are going to the opening train, the stocks that are going to do better as the economy starts to open up. So, Stephen, we've talked a lot about equities and how they probably are going to continue to perform. Well, what does this mean for the sixty forty shift, given that we do expect growth to lead to a hiking FED and possibly a longer term positive look, Well, I think we have

to really look at that sixty split. So right now our view would be probably to be overweight equities, which we've been for for a period of time now UM and underweight fixed income, but not moving away from fixed income. I think on that of fixed income, you want to probably focus on yield or the yield advantage spread products

if you will. Within that area, you might want to look at corporate debt, particularly focusing on sectors that could be upgraded or arguing that there is going to continue to be growth and so UM, you can get fairly significant growth with upgrades. To look at bank loans, emerging markets look um, look like there's some good opportunities there, and we're also positive on some municipal again looking for upgrades.

My point being, you can invest in fixed income that isn't quite so dependent on changes within interest rates, don't just focus on duration. And then also we're more positive on alternative investments, particularly private credit, which has had amazing growth, has a good yield advantage, and real estate, particularly private

real estate. A lot of opportunities right now in the industrial space, as as we have to have warehouses and that type of thing for electronic or online shopping um, and we have a gargantuan underweight or or we have organs to in shortage in housing right now, we need in the United States about one million units a year and it's going to take a while to catch up with that. Not only that, there's a terrible dislocation as people move away from the big urban centers and to

other places as they work from home. So a lot of opportunities there as well. Stephen, does dees crypto count as an alternative asset or not yet? I think that it's it's very interesting that I think the mainline UM investment managers investment allocators haven't got to the point where they put that in as a crypto asset. But clearly it doesn't have UM the same correlation to other assets, and that by definition does yes make it an alternative asset.

How far do you have to stretch how much out of your comfort zone in order to get returns that people are looking for to survive after they retire, Well, we want to be careful with that. UM. We want to be careful to not be in a crowded trade, meaning when everybody starts to go in a direction, even if they're right, it gets overpriced. And that's where I would be cautious about the rush to to investor protect

for inflation. UM. The University of Michigan outlook for inflation still is over the next twelve months about five In the next five to ten years, three percent. That seems reasonable. That seems like what UM what the reserve banks have been trying to do for a very long period of time. So I don't I think that, especially those who are towards a retirement age, need to be quite careful about going out too far with risk. I think they need to look at their portfolios and really balance at risk.

That's why um and not not go too far into the inflation camp or not go too far away from the inflation tent um. So kind of a modest portfolio rather than stretching too much. And Steven, I'd love to get your thoughts on junk bonds because the Bloomberg Terminal had a great story out this week exciting data from

Fitch Ratings. Just ten US high yield issuers have defaulted this year on a total of about six point nine billion dollars worth of debt, and there was also a one hundred and three day stretch with zero defaults, which is an all time long stretch, which is pretty amazing curious. You know, when you're examining the fixed income landscape and thinking about risk, where do high yield US bonds fall? So we definitely look at high yield, but also bonds and aren't high yield you are? That was a great

article and yes, default rates are way down. What a little bit more focused on where there might be upgrades because if you see an upgrade, you can have a significant increase in valuation. The other point I would just make about high yield is that you need to look at your entire portfolio because high yield is much more correlated with the equity markets, certainly than sovereign debt or treasuries, and so you want to make sure that you're aware

of what risks you have in your portfolio. So if your overweight equity and overweight high yield, you know you have a lot of equity risk in your portfolio, which if that's what you want, fine, but you need to be aware of it. Stephen Dover, thank you so much for being with us. I really appreciate your insights. Stephen Dover, Franklin Templeton, Chief market strategist and head of the Franklin

Templetood Investment Institute. We have been looking at a market that very much has priced in six point eight percent consumer inflation. Annie Pecos, professor and virologist at the Johns Hopkins Bloomberg School of Public Health, and he don't worry. I'm not going to ask you a question on this

this pandemic. I want to talk about this a macron variant, and I think this is a really important conversation in if it turns out to be much much Milda, but far more contagious how do we treat that from a policy perspective, from your standpoints set, how do we make that change? It all comes down to hospitalization rates and severease disease rates. UM. There's preliminary data now suggesting that a boost will probably give you a really good immune

response that protects against a macron. And therefore, if that holds true, then the current strategy of getting people boosted UH should be able to limit our severe disease cases and allow us to keep going without any major changes

in what's go in our public health intervention policies. But you know, we're far away from that because we're certainly dealing right now with a delta surge that's really approaching UH peak levels that we've ever seen here in the US, and so we're really in a bit of a pickle here in terms of trying to figure out how to deal with the current delta as well as prepare for a potential OH macron. There are a lot of issues

embedded in there. I want to tease out one idea of quarantining if you're exposed, because that's been highly disruptive, especially for kids who've gone back to school or people going to the workplace. And this is one big, a big reason why people are worried about bringing people back to the offices. How transmissible is somebody who has been inoculated three times, who let's say gets a breakthrough infection or even twice, Are they as infectious as an unvaccinated individual.

Data suggests that you still will be more likely to not transmit the virus. There are certainly some cases out in the literature right now where if someone who's been vaccinated gets a strong infection and has a lot of virus, they can transmit. But in the for the for most people, vaccination will reduce the transmission of the of both delta and we assume now for O. Macron um um to other individuals. So vaccination still is the route to sort

of turn the curve here. I think the thing we really have to think about right now, particul when it comes to a macron is we've seen data that's mostly focused on vaccinated people and individuals who are relatively healthy. We haven't seen cases of all macron in vulnerable populations,

the elderly, IMMUNO compromise, people on on cancer therapies. It's what O macron does in those populations that don't have the protection induced by the vaccine, that it's going to be really important to to judge because if those vulnerable parts of the population are even more sensitive to severe disease with a macron, then we really have to rethink

some of our public health approaches. But Andy from a public health perspective, just going back to vaccinated individuals, if they are not that contagious, they don't spread the virus, why are they being tested five, six, seven times to travel in any way, shape or form. Why is there still the surveillance and possible quarantining of them if they get exposed and if they get a breakthrough infection. It goes down to the layered approach to limit transmission and

limits spread of the virus. So we never want to rely on one thing, and oftentimes the testing combined with vaccination status is used as at least two ways to make sure that we're catching nine plus percent of people who are potentially infectious. And so that's really the point here when it comes to that strategy. I will say though, that there are better strategies to do the testing rather than our our nasal swab PCRs um an EAGINE testing

at home testing. These are things that we in the US in particular haven't taken advantage of that could make this whole process of testing and being certain that you can go back to work, back to traveling much more easier. Well. Obviously, in the US we do have the advantage that we can get access to that testing if we if we

try hard enough. We also have ample access to vaccinations and booster shots, whereas a lot of the world doesn't even have a large portion of their population given their initial doses yet and the who is saying, hold the conversation on boosters, we need to focus on getting more of the world vaccinated before we have that conversation. Do

you think we're misaligning our priorities. It's important to note that a global pandemic requires a global response, and certainly getting more vaccine to other countries has to be a high priority. I realized that there are always interests in terms of protecting our own population to the to the greatest degree possible. But at the end of the day, O Macron is showing us yet again what we can

expect from stars Covie too. If we don't get even better at vaccinating the world, the doses that have been given so far to Africa are a great first step, but if you think about the population of Africa and the doses that have been promised, we're still nowhere close to being able to move on that one continent to a level of protection in the population that would help us really reduce the amount of variants that are emerging.

And the thank you sir as always into other weekend re pecost of Jones, Helpkins jointing us on d c andy block ahead of US government offense at Investko. And you said it would be the nightmare before Christmas. We all want to avoid that. Are we avoiding that? And date John, I think we're under the path to do that a month ago. If you talk to me, I would just say it wasn't gonna be the nightmareber for Christmas.

You had to get government funding done, you had to increase the debt limit, you had to get the bipartisan infrastructure bill, and then still at the same time trying to get the Build Back Better bill. Well, we've gotten by partisan infrastructure bill that's in place. We've agreed to fund the government at least till next February, and now we've got a deal on the debt limit, which is

probably the most important things with respect to the markets. So, um, we're in a good path and now we're gonna see when and how we're gonna get build back better done. If we don't get built back better by the end of the year, will we ever get it done? Absolutely, I think there's a big chance. I mean right now we're like a chance we it had done this year. Um, but we're probably seventy chance it gets done. I think there's a there's a good sense that Democrats want to

come together and get that done. It's just no matter what it looks like right now. And the question is when will progressives understand that Center Mansion is only going to go so far and cut the deal. That's what this is about at this time. Right now, we're going through the bird bath this week on the technical things to see which of these provisions can survive that, whether it's immigration, per crictive prescription drug pricing, or the ev

tax credit. And then from there we have to go into the substance of things that Center Mansion has an issue with, including pay family leave, some of the climate related issues, and also the extension of the Enhanced Child Tax Credit. The reason why I ask Andy is because it seems like the more we talk about inflation and where we get pushed back to further stimulus as being an inflationary at a time and we don't need that. In fact, we need some curbs to what we're seeing

in terms of how much prices are rising. How does that color the conversation in terms of policy going forward at a time when we hear increasingly protectionist rhetorics the likes of Janet Yellen and Gena Raimundo. No, I look, I think you're onto something right there. So first, with respect to inflation, you can expect Center Mansion to um capitalize on the announcement today which we expect the high

inflation number to say, hey, let's slow down. He's been saying that for some time, so that's gonna interject itself into the build back better debate. But also with respect to what you're talking about about the protectionist angle with trade, I think, yes, this is this is an issue that's

out there. Well, let's talk more about inflation, because we've seen the President at least try to be seen attempting to do something about it, tapping the Strategic Petroleum Reserve, trying to do something about supply chains and and fixing ship ship shortage issues. None of that has really helped to this point, at least American. The American populace doesn't feel that yet. Is Biden's approval reading going to continue to be tied to price pressures? So, Kelly, I think

you're on something really important here. Um. When we look at lation, we think from a political standpoint, and we look at it from a market standford. From a market standpoint, we're looking at the fundamentals. We're looking at housing crisis, wages, those things that are sticky going for long term. But politically it's really and you've talked about this on the program. Already gets gas and groceries, that's what people feel UM

in their pocketbooks. Now. The good thing for Biden is that recently, UM, some of the gas prices have started to tip down. He's going to try to take credit for it with the Strategic Control Reserve. That's gonna be a temporary hit if if anything. But really about the new UM, it's about omicron and fears on that and also some of the productions increased. So it's a lot

of these things when we're talking about inflation. Unfortunately, out of the presence control, but he has to make it look like he's working on and he's doing and he's doing everything he can and um, but ultimately we understand that the economy is so large and and the macro moves are so big that the federal government really can't drive that. And what you might get the current strategy this people saying you know what we feel this, it doesn't feel good to me. And then you've got the

administration saying, but it is good. Not tell you what it's good, A base, A d A and people what you might give. Just that tension between how people feel and how the administration is turning around and saying, now, this is how you should feel because actually it's really good. And it's the media who's not covering the data properly.

So that's the that's the we ultimate disconnect that we found in politics is that you you have the numbers, you have the economists saying hey, on a macro level, GDPs up this or that, but really it's about what people feel every day and so um as there's an old saying, UM, I think my angels said. People don't. Um, they don't. They won't remember what you said. They won't't even remember what you did, but they remember how you

made them feel. And so whether that's and how you speak to people or what's actually people are feeling each day, that's what's gonna drive the decision making, that's gonna drive their mood, and it's gonna drive the calls. The biggest challenge at the moment for this administration, without a doubt. Andy, Thank you, sir, at least domestically, Andy Blocker Investco. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us

live weekdays from seven to ten AMI Eastern. I'm Bloomberg Radio and I'm 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