Surveillance: U.S. Inflation With Kelly

the Shop. David Kelly, I've never heard so much micro analysis in our life. Are the pros right? That is transitory? Part of its transitory, part of it has to be. But but where in the midst of an inflation heat wave here? Uh, you know, we're printing numbers above five percent a year over year, and of course it's going

to back down from that. But what I think is interesting is that all let's talk about inflation, all us acceptance of inflation, all this these news headlines that's feeding into inflation expectations and inflation is to some extent a self fulfilling prophecy. So when people believe there's going to be higher inflation, they think they can raise their prices, they feel like they're they're willing to pay higher wages.

So the broad picture here is one in which inflation is still running pretty hot and is likely to stay hot through the end of the year until really we see some sort of economic slowdown, which it doesn't seem to be on the horizon here. So I think this is still a very hot report here. So, David, do you think that the market response, the knee jerk response, is wrong that basically on the margins bonds yields into

a little bit lower on this faith that it is transitory. Yes, well, I think I think we're too obsessed with second derivatives here. I mean, we're looking at, you know, the declines, but we're still a on of five handle on inflation. So to me, it's not so much the the outer our reaction of the bond market, um. It is the notion that you could have a five percent inflation rate with

the one point four percent tenure treasury yield. I think that's that's extraordinary, um, and I don't think it will persist. I do think that we're going to see later on this month of FED is gonna, you know, say that they're gonna lay out plans for tapering. I think I'll start tapering at the end of the year UM, and gradually that's going to push interest rates higher. I think it has to, given given where the inflation rate is and and the fact that I don't think inflation is

all transitory. I think some of this will stick around for the rest of this expansion. Let's put some numbers on that, David, the kind of numbers you're looking for into twenty two four handle on inflation, three handle, what is it? Well? I think I think the first thing is that at the end of the year, we're expecting to see a consumption to flatter inflation rate between three and a half and four percent. So the FED is, you know, have jumped up to three point four percent.

I think there's still low on that number. And then going into next year, I think we'll have persistent CPI inflation of about two and a half to three percent UM, with the consumption inflation inflation rates running about two four to five year over year, so well above that the FEDS to percent long term target. We're still not looking for hyper inflation. I think the economy will eventually so

down enough to avoid that. But I think we're back into a new old normal where inflation runs above two percent on average rather than below two percent on average. It's the Fed comfortable with that dynamic divid They shouldn't be, because it's not just inflation, it's about as surprises too. I think there, I think there there should be a growing recognition that a very very long period of super low interest rates is not only setting the stage for

higher inflation. It's enabling pretty reckless fiscal policy in many ways, but it's also spurring asset bubbles and all those things you know are our landlines for the economy going forward. So the Fed shouldn't feel comfortable. What they should be doing is getting ready to raise interest rates and to cut back on bomb purchases. And John Farroll, we had read and green in the screen, down up, others not,

and now they're all green in the screen. SPX and Dow futures, John Outter, record high features up thirty seven, advance in a quarter of one percent to yields behave in themselves will lower by a basis point of the front end. Now the two years at about two basis points. Called it twenty three. David Kelly with your frontline economics and also doing strategy for JP Morgan. Fold this economics and macro price change into the JP Morgan conviction on

the equity market. The key thing is that this, you know, we're we're still speeding, We're just speeding a little bit more slowly, but we are exceeding by a long shot, the capacity growth rate of the U S economy. We're barreling towards full employment, full capacitalization. That does push up interest rates. Now everything pivots off interest rates. You've got higher long term interest rates. I think that you'll see a return to this UM, you know, growth to value

rotation UM. I think that you'll see a return to UM, you know, a sort of compression of valuations across markets. And you know, particularly when I look overseas at very cheap um equity valuations and relative terms overseas. I think that's going to become more important UM as interest rates rise, because interest rates forced you to think about valuations. I do think that higher inflation, strong growth means higher interest rates.

At heart, you're a policyman, David, so let's finish their Muhammad erin the Washington Post on Friday put out an article basically asking a question whether the dynamics that we were discussing would overwhelm the administration's goals. Do you think it will? Um? I think I think it could well because I think people are misunderstanding what's going on the economy. The economy is adapting to COVID. I mean, we had one, We've had one economic wave, We've had four pandemic waves.

But the economy is is in you know, sort of shrugging these things off. It's heading towards full employment. I think the dangerous the economy will overheat before before the administration can achieve a lot of its long term goals, and just dealing with the macro overheating issue is going to prevent them from dealing with a lot of the goals they want to achieve. So I think that's fair common. You have a friend in West Virginia, David Kelly. Thank you, sir.

J P. Mrkan as in management chief Global strategy is sounding a little bit like sending a mansion at the end, there, Tom the senator from West Virginia. Let's kick things off with Tony presnzi Let market strategist, portfolio manager and Investment Committee member. Tony, you've called it preparing as the right crescendo. What do you mean by that, Tony, Well, I mean to find a name other than transitory that's closer matching

to my name. Other than that. Other than that, there are many things, of course that are peaking, but a crescendo is probably a better word to think about musical band. Of course, the music keeps playing, so, in other words, for inflation, even though it'll peak at some point in terms of its sound, the level it still might be high, um,

and that might unnerve investors at some point. That's why, as you all know, this morning's data is important, and of course the data in the court a quarters ahead in terms of the inflation story, whether the Fed can can re get gain control of the narrative, which it pretty much did in June. Tony, you've taken over the mantel from the great Fabosi in terms of writing the book. The new book is or must read, folks, the strategic

bond investor. It's actually an English which unlike many many bond books and in their Tony, you go to the buzzword right now, which is narrative. You talk from tulips to treasuries. What that's you know, the market talk that's out there. What's the narrative right now? That is wrong to use the twenty tens analogy for today. The twenty tens analogy was that if we used if we apply what happened in tens to ties, will probably all get it wrong. By it, we probably mean the inflation rate,

interest rates, and even the growth story. Um now, some of these things will be given than last times. For example, interest rates could well be higher than in the last decade, but that doesn't necessarily mean that equities will be lower in the comic decade, because what we have seen is a reboot of the because of the COVID crisis. And I think back to May in June called Cornwell Consensus was a G seven meeting on a document written in Cornwall when we're in England where the Chief seven met uh.

It aimed at fostering better conditions for growth, in part of course, to take on China economically, which, by the way, it's not such a scary thing. We think back to the Cold War nineteen. If an investor went in the cave, it was a mistake, of course, that the global pie grew and it made sense for investors to be invested here instead. Of an arms race, it's a tech race.

It's economic and economic race that the nations are coming together to to to to win, and so we may have a much different story in its three and a half trillion dollar bill that has been passed along with the one trillion dollar bill, is an effort that is consistent with the so called Cornwell consists consensus to create more inclusiveness, to make economies greener, and of course to

digitize and to be bigger economically. Tony, the three and a half trillion dollar plan, it's unclear why there it will actually pass. A lot of analysts put it at a fifty fifty at best. You have this one point two trillion dollars in total, fifty billion dollars of new spending that may get past the infrastructure the bipartisan bill. If the three and a half trillion dollar plan does not get passed, do you still foresee higher yields in

this cycle than we saw in the previous cycle. It's highly probable, as you say, at least so that the bill will be smaller than what was passed. We see it probably closer to two chillion, but there are upside risks to that. But the likelihood of passage by the end of the year seems very high, but it is an important part of the equation because investment in people and things, infrastructure, broadbrand technology, as the first bill has

investments in those are the things that drive productivity. Remember the simple math on economic growth in the US. Historically it's been one plus a two one increase in the amount of humans to produce goods and services and to percent increase in how productive they were. That math is change the one percent to increase in people, as we see because of retire retirements, is now about a half percent is projected to be there for the next thirty years.

According to the Congressional Budget Office the CBO, productivity has been running about one and a half percent, which of course is slow. But to get that number higher to make a better story in terms of the growth picture, UH, there need be investments in people, UH and in things and and ultimately final the final word on this is that what the biggest jover of productivity and therefore growth is UH total factor productivity. Fancy way of saying, how do we use people's skills? How do we use the

things that are in place to produce things better? And faster. Uh. That that will be determined by the private sector primarily, but the government sector seems to be engaged even in Europe and in the same vein and uh. And so it's an important story that's developed in terms of the efforts to invest. Tony, you gotta leave it that it's gonna catch up to John strategist and pull folio manager, Tony.

Thank you. Joining us now is Patrick Palfrey of Credit Swaye. Patrick, let's stop right there your recording market call five K year end next year. But within that and I find this really interesting. You're not looking for multiple expansion, quite the opposite. Can you walk me through the cool Patrick? Yeah, John, I mean you're you're absolutely right. I think what a lot of people are under appreciating about this curb, Patrick,

is just how strong the corporate profits are growing. And in reality, we're seeing the growth in the E outstripping the P. So what that means is the PE is flat to slightly down from here. I know it's hard to wrap your head around, but when you have profits going this year followed by high single digits next year, it allows for multiples to stay constant and flat as opposed to expand. I think that's critical as we look at what the driver of returns are for the next

twelve eighteen months. Patrick, the credit suite heritage in New York is extraordinary from the late nineties, and Kent Osben and Michael Mobison and the rest dominique constant onto what you and John gollub are doing today. It's hyper hyper detailed in your factor analysis, which is the factor on the scattered at chart that gets you to a gallup five thousand sp X. Well, right now that that factor's value,

it's pro cyclicality. Uh, it's looking at the infrastructure package that potentially just passed and the one that is getting framed out currently and looking at what's going on with interest rates and saying where can I get exposure to the dollars being spent? And that is economic sensitivity. It is financials, its industrials, its materials, energy, it's anything that looks traditionally value oriented. That's where the leadership is going

to come from. Over then your intermediate term, Patrick, I want to understand your call for much fatter earnings going forward, so the PE ratio is to actually start going down despite the fact that price well couldtinue to rise. Mike Wilson of Morgan Stanley yesterday came on and he said that he thinks people are underestimating margin pressures. This seems

to fly on the face of your call. Why our company is going to be able to continue to pass along expected at price increases for their inputs to consumers for the foreseeable future. Well, I think it's actually simpler than that they pass them along. It takes time, so it doesn't mean, you know, month to month, there may not be incremental um input costs, building. I specify input costs because margins the total picture. And often times when

people talk about margin, there's two components. There's variable, which is that input cost pressure and how that gets passed through, and then there's the fixed part. And in reality, when we begin to pass through those input costs, you're driving higher sales over the existing fixed cost part of your business. That's your machinery, it's your um, it's your buildings, it's all those long life assets, and that causes significant margin

accretion driving higher sales over those fixed costs. So really, what we typically see as margin pressure arises when sales begin to falter. As long as sales remain healthy and demand looks great. The inventory backlob looks phenomenal. Um. We do not seeing margin pressure um coming from any of

these issues. Patrick gotta jump in with some news, just some amazing headlines coming from the National Security Advisor, Mr Sullivan, Tom saying that Opaque plus must do more to support the recovery, that OPEC plus production boosts have not been enough. This is the first real sign of the administration starting to lean on OPEC plus, Tom, because of higher crude prices and ultimately because of higher gas prices in this country.

And what's different here, it's not the it's not the process John, that we remember from years ago, with American independence and with Americans supply elasticity, our responsiveness to price. We can fix the problem to a great extent if we get higher oil prices. Clearly administration thinks barrels high low right now lower sixty seven five step on w t I list, we're down by about one point two percent. This is Jake Sullivan, the National Security Advisor, basically saying

Lisa that Okay plus needs to do more. Why now, that's my question, Why now this morning, why this morning, ahead of the CPI print. I mean this to me is a difficult sort of a thread needle to thread because right now we're looking at a market. Thank you. I try, I really try hard, but John that to me, I think we have to repeatedly ask throughout them. The clue is at eight thirty Eastern, isn't it? When we

get an inflation report in America? Patrick? Just to wrap up here, energy in the equity market, that sector is up thirty one percent year today had a bit of a battle, particularly over the last week, given what crude prices have been up to. Where do you stand on energy? Well, right right now, I think it's really just depending on where the party goes and looking at what just came out, should should crewe begin the back of herre. I think it is a little bit more difficult for energy to

continue to work. But over the longer term, we still think demand remains strong. If we look out twelve to eighteen months, um GDPs are suspected to run well above trent and that is really to keep a bid under oil um in all commodities for that matter, and and really continue to tell the energy sector. So today may not be the best tay given the news, but but longer term we think it's still work when the administration

wants to do something about it. Patrick, It's gonna catch up, Patrick Poufy, that of credit sways a joy to speak to. Steve sad Off to say he's former Sex CEO barely describes his contribution to fashion and retail when you hear the word exclusive, he invented that. He's now Mastercard's senior advisor on a boom economy, Steve, I want to go

to mortar and brick at seven sixty Madison Avenue. Aramez is taking a landmark building of brick and mortar and they're building it out, and it really speaks to the durability of on site retail versus Amazon. Tell us about the presumed death of mortar and brick, and I think this death of retail and brick and mortar was so

short lived that brick and mortar retail is back. If you look at the MasterCard spending POLT data, it would tell you that for the month of July, for example, brick and mortar was a versus year ago and represented of all commerce. So while the digital has transformed shopping, people want omni channel. They want product whenever and wherever

they want to get it. The physical retail store is back, and you're seeing across the board, and the ur Metta's example that you just gave is a good one relative to stores are reopening, they're more reopenings of physical stores right now than we've seen in years. Not I'm not talking about reopening the closed stores. I'm talking about opening new stores. So luxury is back. What you find is that the across all levels, the lower end, the high end,

you're seeing people back in the stores. They want to experience shopping. They've missed shopping in the physical store. Yes they're buying online, and yes, brick and mortar has gone I'm sorry. Digital has gone from all percent of commerce to eighteen percent of commerce. But luxury and physical retail is back. How will Amazon respond to this, all of this the pandemic. How does the Amazon with a relatively

small part of your world, how do they expand their world? Well, I think I think Amazon is the gold standard in terms of the experience that consumers. Yet remember they want an omni channel experience. They want the physical store, but they also want the convenience of online, so online. I would never never underestimate Amazon and its power and the

impact that it has on the rest of commerce. But I would tell you that the brick and mortar physical store use examples like a Warby Parker where they when they open a physical store, they get triple their digital business. So it's this interaction of the physical and the digital that is so important. And in the post pandemic world, we've seen how important the digital piece of it is. But it's not digital alone, Steven, and that really is

the story of what you're seeing in the data. But Steve talking about the changing nature of brick and mortar with the digital aspect of it, I'm curious about the location of where brick and mortar is coming back fastest since there has been a migration. And when I look on Manhattan's streets, for example, there's still a lot of

empty storefronts for rent for retail. Yeah, I think that you've got to take New York a little bit as an anomaly to what's going on around the country because so much of the New York business, let's take the luxury side of it as an example, somewhere around it is tied to international tourism, which isn't there right now. So New York, I believe does have some long, you know, shorter term issues. Long term, it will come back. But I think that you're seeing it across the you know,

you're seeing some shift back to the malls. Mall's performance was positive in the last several months. Look at the numbers that Simon's putting on the on the board. So I think that it's going to be a back into Certainly some of the malls. Suburban markets are performing well, and a lot of the secondary cities are performing very well.

I think New York's a little bit slower than other UH cities, but I think that you're in a period of time where this is a little bit of a Goldilocks retail environment because I have never seen in years almost every sector of the MasterCard the categories performing well. Luxury look at the numbers, You're a fifty percent versus the pre pandemic period. Luxury jewelry department stores are up seven percent versus a pre pandemic period. You're looking at

a peril growing at ten percent versus nineteen. I'm not talking about last year's numbers. That's there was an anomaly because of the pandemic, but versus pre pandemic levels, and that leads you back to your question about stores opening up in the UH in the urban areas and some of the suburban because when you see this kind of growth and the omni channel presence the consumers there, so retailers start opening stores again. So just what would you

say to people who say this is somewhat idiosyncratic. People are getting back to work, they have to restock their wardrobes, perhaps after the pandemic fifteen or whatever you want to say, They're going back to school. There's a huge seasonal factor here that could potentially be pushing these numbers way beyond where they will be averaged out by the end of

the year. What do you say to people who would argue that, well, I think that there's some element of you've got the benefit of the child tax credit, for example, that's helping the You saw a bump in the end of July and the MasterCard numbers as a result of that. I think you have this near term phenomena of a shortage of inventory. Right now, you can't find a product,

so you're having very high full price selling. Gross margins are favorable, your supply chain costs are high, and that's going to start to even itself out as you get into next year when more inventory is going to be available.

I think that right now you've got a period for next three six months where it's a little bit of a the powers in the hands of the retailer relative to the promotional environment, and people have to grab product when they can because it's hard to find, uh, the kind of product you want, especially unique kip ranching items. But longer term, uh, you know, this is a retail I've seen it so many cycles where when product becomes available,

retailers will order more product. You're gonna start to see more availabilities you come back into next year because there's always that desire to catch the last sale. And then I wouldn't be surprised as it go a year from now, you're going to find that you have your back to a more much more normal inventory environment. Steve, thank you so much? Do you say? Forming a sex fifth avenue and with master Card is a senior advisor. Great to

hear from him, Nicholas Agazine. He is the CEO of the Hong Kong Exchange and as you rightfully said, he's the former Agent PAC chairman of JP Morgan as well as the head of International Banking at JP Morgan. But now since May twenty four or thereabouts, you've been the CEO of Hong Kong Change. Obviously much of your time since you took over as the CEO here has been consumed by the regulatory changes and the turmoil on the markets here and the sell off in many of the

platform companies. How are you, as the head of the sea of the market here, going to weather the storm because we don't know how deep and how long this is gonna last. Yeah, well, thank you great to be here. So firstly, it's it's it's obviously a great day for us because we've announced our results, which is you know, record revenues, record profits, record connect program and revenues as well,

so lots of good things. As to the regulatory environment, which is like your first question, the thing is this is happening all around the world. We see a lot of antitrust regulations being implemented on big tech. It's happening in Europe. The Chinese authorities are in their long march to seeing how they're going to regulate this part of the industry, which is a new economy. Different experiences around

the world. They're doing it in their own way and trying to adjust to what's the right way to regulate this. So this will take some time to trickle down through the system, but we can't downplay the significance of it. When you look at the waiting of the Hank Saying Index, Ali Baba's number one with about ten percent, and number four is tens and number five is made one. Three of the top big companies that are under direct regulatory scrutiny right now about of the market waiting of the

Hank Saying Index. So there's so much pressure internationally as well to do we stay in do we pull out? That's the question a lot of the international investors have right now that you have to deal with. You talked about these challenges in the earnings reports today. Yes and absolutely now we have not seen the volume decrease and actually volumes are pretty constant and there is continued activity. I do believe that there will be an impact. We

have to see how this impact trickles through. But we're seeing similar type of modifications to how big tech works all around the world. All platform businesses are being scrutinized, how they use their data, how they manage information about their clients. Do they have too much power how are we going to manage their how they deal with the public. So I don't say that's too different from what we're

seeing in other places. It may be perhaps in its own way in some sectors like education, it may be in a specific way that we don't see too much in other places. But if you look at big companies, it's it's very very similar. How's it impact in the ip of pipeline because they were down in the second quarter after what was a blistering first quarter that I mean, that's correct. I mean, if we look at the first six months, forty six I p o s, that's doubled what it was in the first six of last year.

It's slowed down a bit on on on the second on the second quarter, and the pipeline is actually a record levels. I mean, if we look at how many companies have actually filed and are being analyzed, we have around two companies. So that's a very very significant and healthy pipeline. But it's tech holding off right now, and there's been lots of reports that by Dance perhaps is

going to go ahead despite this regulatory scutiny. First of all, in the first six months of the companies that listed these forty six that I mentioned were tech companies, So they are the ones that are coming. The companies will of course assess the market when is it too volatile to go? But but there are companies listening. There's a listing ceremony that we have tomorrow. I mean we had

one last week. I mean so, so the activity has slowed down because some companies are evaluating the market is this is the best market for me to go or not. It has slowed down. The pipeline remains very, very strong, and we actually have more and more companies that are inquiring about doing an I p O in Hong Kong. Possibly companies that were perhaps analyzing other markets and now they're asking a lot of questions about Hong Kong. How are you going to put your personal stamp on this

role at a time of course of great volatility. Uh, you know the stock of course, the Paul Cha and the financial secretary told me broke news with me saying he was gonna welcome SPACs. Uh. The framework agreement is it almost ready? Well, I mean there's spects is one of the products that has been discussed for some time. There's a consultation that is going to be launched probably over the next a few weeks, and post that consultation, depending depending on what the output of that consultation is,

will set up the right framework. There are conversation on conversations that are on going between the securities regulators and ourselves and the government, and we're trying to make a framework of an instrument that is actually a high quality in instrument. We want to give opportunities to investors, but we have an obligation also to protect the investors interest.

All right, do you see a decoupling a bit with Hong Kong because of the regulatory scrutiny in and the coupling between the S and P and of course the Hanks haanking here. So if I look at the data, I don't see any possible the coupling in the sense that we're seeing more international investors participating in the market.

I mean, if I give you a little bit of the historical framework of will you look at two thousand nineteen when there was eighty nine billion dollars on average every day, then going up to one hundred and eight billion dollars, and and and right now, I mean when and it's it's almost double. Yeah, it's it's like just like very significant. You also talked in the conference call today about data revenue, but four percent for for that Hong Kong exchange right now, how are you going to

increase data revenue? You want to obviously increase data revenue at a time when China seems to have an iron fist grip on data. It's this is data that we have that we we have to try to use it in as efficient way as possible. So if you look at the averages for other exchanges around the world, it's

a higher number. So what we have to do is to make sure are we doing all the right things that we can with our data in terms of like commercializing with our participants, with the investor community, and and and and that's what that's what it is. It's a little bit data that different data than the one of some of the players. Nicholas Agasin, thank you so much, CEO of Holkohong Exchange. 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 go,