Surveillance: U.S. Retail Sales Surprise

Let's start right here. You've trimmed directly exposure just a little bit, walk me through the thinking gun into your end Well good more and Jonathan, so you know it's not it's not that complicated. I think our view is the stock market is gonna end your higher than it's today. But we are in a period where I think risk is a little high. End. One reason seasonality. I think people are well aware this is seasonally the toughest part

of the year. Uh. Second, the uncertainty around the delta variant. And find something that that both you and least have been mentioning supply chain disruptions. Uh, this is this is a big issue. It's affecting the pace of growth, it's affecting prices. Uh, And it's something we're not used to. We're always used to talking about demand in the post GFC world, but at least in the near term, this is another factor the market's going to be dealing with.

Having said all that, we think these are temporary issues and looking at six nine month stocks are higher than they are today. So where are you trimming rusts? We've been trimming a little bit of our cyclical exposure. One place we have been trimming are the financials. We were overweight financials earlier in the year. We've actually brought that down and part of that is the evolutionary thinking about

rates up. Ourselves include have been surprised about how tame the long end of the US curve has been and what we do think we're gonna see some normalization yields, particularly in real yields. We're not likely to see the melt up that people were worried about earlier in the year. You know, if you look at bond market volut reality, it's been coming down and down and down. So here's

what I'm struggling with. A lot of people are talking about this correction, the supposed correction that's supposed to happen that everybody wants to buy, and yet it seems like we've had trigger after trigger when it comes to disappointing data or signs that perhaps delta is slowing at the economic recovery in a meaningful way for more than just one quarter. What's the trigger at this point, given all of that is very well known, I think there are a couple of things, you know, one of which we

haven't spoken about yet is Washington. Now. I don't think there's anything there that represents a long term issue. We're still getting fiscal support. We're getting obviously a lot of monetary support, but we are likely to get some headline risk as we get later into the month, as we get into October and Congress wrestles with not only that the budget package and the reconciliation package, but also in

the dead ceiling. Now. Again, to be clear, this will ultimately get resolved, but we are likely to see more headline risk than we've been used to in recent years. Russ I look at where we are now on the optionality forward is you know, everybody's with their narratives. You've got a narrative. I know, it's radically different than Jeff Rosenberg's narrative narrative narrative narrative as well? How do you manage in the multiple sets of narratives that are out

there right now? And Tom, I think this is the ultimate question. You know, you have to start with the baseline. What is what is it you expect to the market. Our baseline, I think it's pretty straightforward. Yes, the economy is decelerating, but we expect better than trend m G d P. We do expect inflation is going to be transitory, contain yields in that environment with tremendous cash flow generation. We are still very long equities, even though we have

been trimming. We want some cyclical exposure. We want to pair that with the secular growth areas that we expect to work for year after year. We're less enamored with duration as a hedge, and instead we look at other strategies, whether that's been long the dollar, whether it's using volatilities and asset class and then you manage from there. You manage his unexpected events change narrative. But that's our baseline right now. How do you manage maybe it so if

you're remit, I don't think so. How do you manage commodities, John Ferroll mentioning Francisco Blant at Bank of America with a hundred dollar oil, how do you manage commodities out one year out, two years out, four years to win well? I think it depends on the commodity. We actually do think that oil prices are going to remain firm and in their term, and we've been having some tactical positions to take advantage of that. In the equity market, other

commodities were less sanguent on. You know one place where there has been a big change in our portfolio as gold. Uh, fourteen months ago, we had a fairly significant position in gold. Today we've reduced it to almost zero. Why is that Well, because we primarily think of gold as a hedge against equity risk, and that works when you've got an environment

when real rates are flatter declining. If part of our view is at real rates normalize a bit, that particular commodity is unlikely to work as well as it did in the middle of two thousand and twenty. That's really interesting. A hedge against equity risk but not inflation. Pers say, why is that Russ. Yeah, I think this is a very important point. Your gold is often spoken about as

an inflation hedge. I don't think that's wrong, but you have to look at very long horizons measured in decades, you know, well beyond the investment horizon, and most fund managers, if you're thinking about the near term, there are probably

better hedges against inflation of the equity market. And rather than all own an asset that doesn't produce any cash flow, we would rather hedge some of the near term upside and inflation with stocks that have pricing power in the material sector, in the industrial sector, in the consumer sector, companies that can raise prices as input costs also rise. Russ really good final point. Fantastic to get your thoughts on your portfolio right now. Russ Coastrick that blank Rock

Global Allocation Fund portfolio manager. Seriously, up the Mississippi River, up the Ohio River. And this isn't the romance of Near America. This is the next part of this pandemic. Jennifer Neuso joins from Johns Hopkins Center for Health Security. I'm looking at the heat map in the New York Times, Jennifer, and I'm sorry, this thing is my great and north up to Mississippi, up the Ohio. Is it going to migrate to the northeast, this new agony of nineteen deaths

right now a day? Yeah, I mean, I don't think anybody should get complacent. And certainly as we had indoors, because the weather is getting cooler, that raises the possibility that we could see search of cases and places that you hadn't seen it in the previous weeks. That said, I'm much less worried about the Northeast compared to the southeast, which has really been hammered by this virus because of the higher vaxination coverage. I'm confused over boosters. John's confused,

Lise is confused. We're all confused. The only thing I know for certain I used to dread going to the doctor to get whatever the booster was because it always hurt more. Is the booster gonna hurt more? I don't think so. My second shot didn't feel like anything. But if you're confused, you're not alone. I think a lot of America is a part because we haven't had the scientific community come together and formally evaluate the That's going to happen on Friday UM with the FDA Advisory Committee.

We'll see what they say, UM, my guess is that you know, there's clearly a case for third shots from you know, compromise that's already happening. Um, there might be some evidence for people over the age of six five. Um, but I am not yet convinced that anybody else needs it at this time. Dr needs. I love that Tom asks the real questions of is it gonna hurt? Do I need a lollipop? And that's right the question, Yeah, exactly all the uh answering from our kids. So we

talk about boosters, who do we listen to? Can we trust visor that came out yesterday and made this big presentation on how important boosters are and how your immunity wanes after the initial two doses. I think you can trust the FDA Committee and the Advisory Committee Immunization Practices will meet next week. Uh. You know, these are scientists or beyond reproach. They'll be tearing into the actual data and looking at it and making their judgments and whatever

they recommend. I think, Um, you know, I think it's likely to be some some consensus around that. Meanwhile, overnight we got some news that China has vaccinated more than a billion of its residents of its citizens. How important is that given some of the efficacy of that vaccination and what we know about that. Yeah, I mean it is important. You know, every vaccine in an arm is a serious illness um averted. And although um, the vaccines

being used to China has probably less protections than others. Um, you know, it's still fairly good at keeping people out of the hospital. And you know that remains my top line goal for vaccines. That said, UM, you know, I think China and other countries are potentially going to be looking um you know, for additional doses in the future. Um, but my overarching priority is we need as a globe to make sure we get first and second doses into arms before we even think about the third doses. Jennifer

A question off the remit. Peter Hotez is all fired up that we've succeeded in mRNA for which rich wealthy nations, but we need to figure out a COVID kill or for poor nations Africa, India, you name, the rest is Well, from where you sit in your research, how are we how close are we to a successful non fancy vaccine for the rest of the world. Well, I reject that our m RNA vaccines are not appropriate for the rest of the world. UM. You know, there they are potentially

being used. I think some people worry about the cold temperatures. I think we're learning better about the stability of these vaccines at different temperatures. And also, um, you know, Africa has proven its ability to um maintain a cold chain. UM. So we first of all need to start doing more with the vaccines. We have to improve access. That said, I think there are other vaccine candidates on the horizon

that will add to it. I mean, we just simply need more vaccines than we have right now, so I'll take them all absolutely. I look, Jennifer, where we alre And again it's about the booster. When am I going to get a booster? Is a booster upon us? Well, you know, my guest, and this is just reading. What he leaves here is that if the FDA Committee UM endorses anything, it maybe boosters over the age of sixty five, which clearly isn't you Tom, But you know, I think

that might be the next that might be the next offering. UM. And you know, we'll see. I know the President is eager to push these, but really we need to let the scientists evaluate the data and again not distract from our top line mission, which is to get first and second vaccines into arms. Jen thank you got to leave you the dr Jennifer now so that John's helping center the half security Sitia Scota, this is really important discussion.

Thomas Costs joined us with pick Day right now pick Day wealth Management, and Thomas, you got buried in your note a really really, really important sentence. You ignore consumer surveys. Why I do? And I think it was the right thing to do because we've seen retail sales data that actually the U. S consumer is fine, and I actually look at credit card data and I see that, you know, US consumer is fine, is happy to go and spend

and take more credits. So I'm a bit yeah, a bit, a bit more um, you know, dismissive of recent consumers surveys. I think there may be affected by the end of the jobless benefits, but otherwise I think the US consumer is fine, and I think we have some data today showing that, yeah, the U. S consumer is fine and can withstand so many headwinds like Delta, like the end of of Chewy and so on and so forth. It's a tiny number. It's a strong be hesitant to move

on from retail sales too quickly. But almost just your view on the business surveys we get from the regional Feds. We have the Empire Manufacturing survey earlier this week that was really nice to the Philly fed busines. Sound look right now, that's a big upside surprise. This is for September. What's the early September day to telling you, Thomas, Well, if you look at the n f I B survey, the Empire survey, I think they are actually much better than expected. So um, you know, the the order books

are actually looking fine. Um, maybe actually too fine, because the risk maybe in two is that we have so many orders that actually there's a risk of having some fake orders as companies in order too much and maybe the cancel orders down the line. But I think so far we're still in the early phase of this, you know, accelerating business cycle. And yeah, things are fine, they're are. There are some bottlenecks, I must say, some bottlenecks affecting cars,

for instance, but they are very niche products. Otherwise, the U. S consumer is fine. US manufacturing chains are okay. More or less. You know, you know, given the supply chain bottlenecks, but otherwise the order books look fine. So I'm actually quite positive on US growth, especially the fourth exam positivity. Then and push it over to the twenty two the

FED decision. How does this so fold in to them? Well, so the FED as already well telegraphed that you know, they intend to taper before the end of the year. I think they won't do it next week because well, first of all, I think Gerald Powell does not want to to rock the boat. You know, we're seeking renominations, so it doesn't want to rock the boat and move financial markets too much. Um, so he's going to probably wait until November. But otherwise I think, yeah, the pressure

is there too for them to to taper. We've given this, you know, strong data and also ongoing strong inflation. I think the regional FED presidents are going to uh, you know, to to want to push towards you know, firmers schedule on tapering and maybe actually they're going to put hockey Is dots in there. Thomas, are you saying that even if the data supports the idea of tapering the bond purchases earlier that FED chair j Powell would not do

so in order to curry favor politically. Well, what I'm going to say is that the it is like a supertanker and you don't change directions so quickly. So, um, you know, they have indicated they want to do it before year, and I think they are going to stick to that view. And I don't see any sign of rush coming from Jeral Powell. So yeah, I think he's going to indicate that it's coming soon, but I think he's they are unlikely to do it, uh next thing, as we have some deadlines in DC as well. That's

that's interesting. It's not the only ones saying it, I know, but it's interesting to me. And the whole idea is you know, to me frankly, John, you know, is the data actually backing a taper that they're not going to do because of other motivations. Some some people are asking that question. Yeah, there, you know, I think it's out there. It's part of the mix of the day and the

huge variance we see her in opinions. Time constr The last time I fell off my seat before today was it the Zurich McDonald's When I figured out this is right down from Bono Strauss Or pict has their wonderful office over the price of you know, cheeseburger and Zurich. This morning, I fell off my chair because you're talking about a Voker moment. You gotta be kidding me that we're gonna see a Voker moment at a three or

four percent inflation rate. Really well, I'm highlighting this as a risk because I think the baseline is that the FED will ignore high inflation. And when I say high inflation, it's two to three percent inflation. However, the problem may come if inflation comes at four percent next year. I mean, it's quite unlikely, but it's not impossible, right, Thomas Costa, Thank you, sir, from PI Tech Wealth Management senior economists down there. We've got some good Xeric stories that I'll

share one day. This is a joy for Lisa Bramwin to myself right now, it's Nudge. The final addition, it gets thicker on radio. I'm showing the thickness here on TV. Cass Sunstein did not want to do this, but Richard Taylor said we gotta do it. Cast cast Sunstein, Richards Tailor Nudge. We're thrilled to bring this to you, right now with a laureate from Chicago, Richard, I want to take nudge and your work over to this crazy baseball season. Your Cubs are in total disarray. The San Francisco Giants

are ascendant now. And the gentleman that has driven forward the San Francisco Giants experiment is a Berkeley Saylor. Right, tell us how the nudge in the behavioral economics folds into the success of the San Francisco Giants. Well, you know,

Moneyball really is a book about the real economics. And uh, when cass and I wrote a review of Moneyball, and that's when I first met Michael Lewis, and it was an epiphany for him that the stuff he had been writing about the Moneyball there with this whole academic field about taking advantage of other people's biases. And that's what led to Michael's book, The Undoing Project. So, uh, this makes total sense. Um and barn could have been a

very good behavioral economist. Berkeley is one of the top two or three departments in that area. And you know his mother was disappointed he went into baseball and not in the economics, professor saying let's go to the biases and blunders of your informative must read book Nudge Great, what are the biases and blunders of COVID in your update? Well, I must say we don't dwell on COVID. We were writing in the midst of COVID and as you as we all have learned, it changes every month, so there

are passing references. The publisher wants said, why don't you add a chapter on COVID, And we knew it would be out of date the book the minute the book came out, so, um, we talked about it off and on. I think right now the key thing that we're dealing with is how do we get people vaccinated? And is is nudging enough? And if not, what else do we need? And and my conclusion is that, um, we we've now reached the point where there are so many people with

very strong, ill informed opinions that stronger measures are necessary. Richard, I gotta say I thought it was kind of funny that you called it the final addition, so you never would be tempted to write this or rewrite this again, and that you thought, well, it is COVID after all, so it's what else you're gonna do? Why not rewrite this bestseller? And pre eminent book in the behavioral economics field.

What though, was the biggest change in how you viewed the way we make decisions from the first addition to this final addition. Well, a lot of it was just getting rid of anachronisms. We had a whole chapter devoted to a very clever solution to the same sex marriage problem that UM just legalizing it was even better. So I think one of the things we stress in the new addition, which is probably two thirds new, is that

exactly this point that sometimes nudging is not enough. And there's an entire chapter on climate change where we start with saying what we need is a carbon tax or cap and trade. I am with every economist in the world on this. If we don't get the prices right, we're never going to get anywhere. I think it's ridiculous that the the bill that's going through Congress now has no carbon tax or anything resembling that we're gonna pay for trillion dollars and not tax something that UM is

killing the world. Is shocking to me. Richard, you said that sometimes nudging is not enough is the answer, and economic one basically causing prices to go up dramatically or is it just a legal one. Well, you know, a basic principle of economics is that it's more efficient to drive behavior through pricing. And this is especially true for climate change because so many of the decisions are being

made at the industrial level. How we generate power, how we manufacture what we manufacture, how do we transport things around the world. These are all business decisions, and businesses react if the price of fuel triples. Well, you know, we do. We want our grandchildren to be able to live in a comfortable world or not if if we do, we're gonna have to suck it up. Sweden has proved that it's possible hundred and twenty dollars per ton, and

their economy is thriving. We can do it. We would love to continue this conversation, but we run out of time, and I greatly we get that. I've got about another hour of questions for Richard Thaylor. He is at Blue School, Chicago, the laureate, a Cubs fan. He's in therapy for that right now. And also the book with the wonderful cast Sunstain Nudge. The final addition, Taylor and Sunstein look for that now. This is the Bloomberg Surveillance Podcast. Thanks for listening.

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