Surveillance: U.S. Stimulus Debate With BofA's Harris

we fear inflation? I don't think so. I think we may get it. I think the risks of of inflation, of higher inflation down the road are certainly going up with all this policy. But I'm not sure there's anything really to fear there. Well, there's not the fear there, but then there's a rate of change. In Antonian analysis of all this, I mean, I don't really see. I do see the vector of five year five years. I get it. It's an impulse higher inflation. But do you

see your rate of change that causes concern? I don't. I think where the global fixed income market is leaves supply and demand supported for lower long term yealds. So I think they can go up, but I don't think they're gonna go up a hundred basis points. I don't think they're gonna go up enough to imparallel housing recovery or anything like that. James, I assume you read the pace from Larry Summers on Friday and to the weekend,

and it's huge debate everybody's having right now. Can you weigh in on that just a little bit more for us, James, you'll take and why you sit on this discussion right now? Well, I mean I've been looking for the package to come down from one point nine trillion. At one point nine is is very large. Um So you know this is uh, this is this is stimulative relief. It's it's stimulus, and it's true. And I think we look ahead to next year. I think it is realistic to get back to full

employment in two thousand twenty two. We're gonna have a little overshoot and inflation in the coming months. It is possible that we have inflation running above two percent, maybe a decent amount above two for the next twelve months. Um, we'll take it. I mean, these are these are good things. Um So I I think, yes, we may get overheated. We may get very volatile markets, we may get a cyclical whip Shaw in the economy. Um, so you're you're

putting more cyclicality into growth. So there's a lot of volatility in a bill of this size, But volatility is not you know, a significant cost given the objectives involved here, which is really to get the economy back to full employment. Uh and and maybe to soothe some of its distributional consequences. Do you take issue with size alone, though, James, Or is it the composition of it as well? Oh? Composition

is quite important. And and actually I would say I think about this as part one because it's clear than when that because this gets past, the administration is going to start focusing on a long term stimulus bill with green energy and infrastructure and and all that. So there's a balance between immediate stimulus, how much cash drop is in that immediate stimulus, and then what is the long

term implication including the later package. Because I don't think you can think about the results of this bill, uh and the politics of this bill without realizing what's up next.

So these are these are all big things, and and this is a major increase in the projected growth of the economy in the in the next few years, if both of these bills get through, and even if this one just gets through at a one point non trillion size or something close to it, James, let's talk a little bit more about composition, and I want to follow

up on something John was talking about. You rightly identified the way that Democrats are painting at the checks is something perhaps a bit more than just relief, but also evening out that K shaped recovery. It is a very important point. Is the Democratic Party framing this wrong? Is there a cleaner economic argument for the money to be going to lower income families in it they will be

spending it more and more quickly. Whereas if you have a certain threshold, a certain cut off that's even known, that will go directly into savings. Well, it's clear that this at one point nine trillion, or even a little bit below that this is gonna be enough money to boost savings, to boost current spending, to help balance sheets, and to boost future spending when we finally get into

a proper services recovery. I think the distribution of this, especially with the payments, is going to be a very large improvement in the short term prospects of of people with you know, the bottom half of the income distribution. How they emphasize that, I think that's a political question. They're just trying to get it past. I think the beneficiaries of those checks are gonna they don't care about, you know, the political operations and how they get it through.

They just want to get it through. They want to get this check, and they want to get through this pandemic, uh and get onto normal life again later this year. James, you agree with what Jenny I was saying over the weekend on Meet the Press when she was saying that if they pass this bill, we could get to full employment by perhaps next year. I think we can easily get the five percent unemployment by the end of this year with this bill, and I think late next year

four percent is within reach. I think full employment is around four percent. I think it's a reasonable thing for her to say yes. And like I said, I think that next fiscal bill is going to be right around the corner. I think in three months we're gonna be talking about green energy and infrastructure. So this is this is really just the starts. The question then, is how to financial markets start to move in response to all that?

Do we see meaningfully higher interest rates, inflation, etcetera. So this this really is changing the macro outlook very substantially. James, what is the inflation partition services and goods? What's that dynamic right now? Where do you foresee it to be in the next twelve months? Sure, well, right now we've had we've had a larger jump in goods inflation than services inflation because for the obvious reason that that good spending has been very strong, services spending remains lackluster due

to the pandemic. We've all heard about this base effect coming in in the next few months. So core inflation inflation measures are really around the world. They're gonna be going up into June. But actually it's gonna be more pronounced at this goods versus services level. Goods inflation, non services inflation is really gonna jump. P p I inflation measures looking at intermediate goods things like that are going to really jump in the next few months. As we

get into the end of the year. Maybe there's gonna be shortages of restaurant tables and flights, and then you can actually get some services inflation. But we need a pandemic recovery for that relative price shot to start to switch around. James Wilson's to catch up as always. Good to see you, buddy, James Sweeney, The chronis Sway chief economist, David Rosenberg and Rosenberg Research, and we're thrilled a good joint us today. David. When you partition our present inflation

and our expectations of inflation, what do you see? Well, look, what we see is a you know, the break even levels Nutinior Treasury, you know, getting as high, uh, you know as they were practically uh, you know, attending to the peak of the last cycle. So you know, we're already well above two uh. And the market is pricing in you know, not just a significant econmount of recovery, but alongside that the closing of the output gap earlier

than expected, and these inflacement expectations. I mean, the company by surprise, how quickly the market is priced in an inflation cycle so quickly, I think it's way overdone. Um. But you know, the big question isn't so much the one point nine trillion dollars. It's really ultimately how much of that one point nine trillion dollars filters through into

the economy. And I would have thought actually that the markets have recognize the survey that the New York Said did a little while ago, uh, following the Cares Act, that found that only of that stimulus sound as play into the economy. You know, the rest went into savings. I guess you could say in the deadcoin and the game stock in the stock market baving, and the rest

went into a debt paid down. Like what I can't correlate is desk in terms of the market mindset, how are we going to get inflation as the household sector is deleveraging unless the marketing ex temporary household household household demand for bank credit is running negative three year of the year negative three, and people think that's going to be inflationary. You're taking a different tech. Can you buy bill notes and bonds today? Can you buy today for

price up, yield lower? Well, I think we're heading into a very attractive buying opportunity at the long end of the curve. I mean it's your bullish on bonds. I be heading towards the thirty year, which, as you said, touch two percent today. The bottom line here is that the set is not going to be plaid in policy for a long period of time, so there's no risk that the cost of carry is going to go up.

The big debate is really is about inflation. Um. But you've got a market right now that's price for inflation heading to the peak we had the last cycle co inflation, and I think that's gonna still be very difficult to achieve even with the fiscal stimula. David. Let's build on this. When we're talking about inflation, as you correctly point out, we're talking about market based inflation expectations. How useful are they, David? How useful have they ever been? Given where we are

right now? How do you move ten year inflation expectations based on what's happened in the last couple of weeks. Well, look, the biggest correlation between the break even is with the CRB index and UM. Of course that's real time Vieto. People don't see is that the biggest component of the CPI, and course CPI is rent and Bacon's reach are going up. The rental inflation is melting, and that's going to be dominating, UM. But the renal data don't come out as quickly on

your Bloomberg at terminal as the CREB index. And we have a commodity boommate going on. But we had we had four or five of these commodity cycles just in the previous ten years, and that cycle from O nine and two thousand nineteen we have four or five. Incredible They look like sign ways, and people get caught offside because they believe that we're going to get inflations around the corner. Uh. And then what was the dominant feature of the last cycle? Did we get cyclical inflation? Yes,

we've got some of it. But the bigger picture is that from O nine and two thousand nineteen, despite all the good dances went fiscal stimulus we had and all the monetary stimulus we had and the quintupling of the stock market, the peak and cor inflation last cycle was two point four percent. To me, the big picture is that you've got to go back to century to find that find the last time cor inflation peaked at such a low level, and we're getting to the break evens

heading back to that right now. So I think that's a great buying opportunity to market right knows pricing in peak cor inflation from the last cycle when the unemployment rate was three point five percent not six point three percent, So to me, this is a great opportunity to get back into the long end of the curve. David, to build on what John was talking about, there's a difference between inflation expectations and actual belief in inflation that's being

borne out throughout markets. How consistent is the reflation trade throughout all asset classes or is it mostly tied to break even and a specific subset of the market. Well, look, I think that you're seeing it across you know, a broad array of asset classes. I mean, you've got the reflation inflation trade in small cap stocks, You're seeing it in commodities. You're seeing that how value as I'll performed growth for the better part of the past few months,

So it's not just in the bond market. Um, the inflation expectations and I've only been feeling called now in the past a couple of weeks over whether the inflation story is going to be the real story. I think it's us to meet to have faith. I think that the class will be about the inflation doesn't come back. That's what the people think. But it's really endemical class. Almost every after class you've seen you right now ready looking forward to getting you back to David. Always enjoy

catching up. Thanks for being with us this morning. David Rosenberg there of Rosenberg Research, and Rita sent is a joy to speak to with energy aspects. What she does better maybe than anybody out there, is the elasticity the responsiveness of supply and demand worldwide. She joins us this morning, Amrita Sent, I think you nail it would demand elasticity being an absolute mystery. How much of a mystery is it right now? Oh, it continues to be a mystery.

I don't think COVID has really helped the situation because you know, even when you had nine of the of a manufacturing down or industrial production shot in this was around March April last year, oil demand only felt by. It does show you how in elastic al demand is right now. Globally, all demand is down about five million barrels per day year on year um which, again, given the scale of relative lockdowns that we're still talking about, even in places like China, it is doing very very well.

I think the cold weather has also really helped. We've seen l en G prices in Asia hit record highs and as a result, a lot of power plants there have switched to liquids of fuel oil LPG. That's been boosting oil as well. And now, of course in Europe and US you've also had a cold blast, so there's definitely support for heating fuels that's potentially masking some of the weakness elsewhere. Like you know, you guys just talked

about airlines. Jet fuel demand isn't recovering anytime soon, but I do think the colder weather has helped at least mask part of that weakness. That's the demand side. Then there's also the supply side, the idea that OPEC plus has maintained certain output cuts and that shale producers in the United States are actually producing almost a fifth less oil then they were, say a year ago, or you know, ahead of the pandemic. How high oil prices get before

all of that supply starts coming up flooding online. I think that's a million dollar question right now. I think you're exactly right. Supply has been a very critical factor. And I think full marks to OPEC for how they've handled the market. Uh, this is very much their achievement and and they will take a lot of credit for this. Saudi Arabian particular coming in with that million barrels of voluntary cuts. Uh, they will start bringing that back from

April onwards. But to your point, shale production, we don't think it's going to go back to the pre COVID levels anytime soon, if ever, because they are more focused on discipline or product the shareholder returns right now. I think in terms of oil prices, part of the problem is that the market can see this rebound and demand coming and supplies remaining tight exactly what we're talking about

right now. But we aren't really going to see the actual demand recovery till qto potentially even the second half of the year. But this is the futures market. We always discount stuff that's going to happen in the future. Now, that's why prices are rallying right now. Should prices today b sixty dollars, No, But we're trading April futures, and yes, things will sequentially get better. Remember, we've also got a very very like easy monetary policy, so much liquidity in

the system. We've always called for eighty dollar plus oil in maybe that is hundred dollars now, given how much liquidity there is in the system, I wouldn't rule that out. We've been talking I'm read of this whole program about how people are doubling down on this reflation trade, the recovery trade. And you do have some naysayers, David Rosenberg among them, and also Mike Muller of v Toll, of

the Asian operations. He said over the weekend, the market is getting ahead of itself when it talks about oil prices going much higher from here. Do you agree? I do think if you look at prompt fundamentals, yes, the market has gotten ahead of itself because right now demand is still relatively weak. It is going to get better. But again, this is a reflection trade. People are not going to wait for the event to happen to position.

Why not position now? If you know if airlines will reopen whenever, that is, if not Q two, it will be Q three or Q four. And I think that is part of the problem. You've seen this across asset classes right that. The reflection trade, to your point, is very much in vogue. However, above sixty dollars there will be headwinds from supply. Yes, US production may not go back to levels, but it will start to rise, or PAK compliance might start to slip a little bit as well,

So yes, I can. I don't think this is going to be a straight line higher. We are also very cautious around the prompt. There's still a lot of unsold barrels in West Africa, for instance, But it doesn't take away from the fact that the second half of the year does look much much healthier in terms of demands. Set the scene two hundred dollar crude next year, second year of the Biden presidency. Some kine it was no doubtor of a nissance macro last week. Who I think now?

Did park the politics? Get rid of the politics when you start to make market calls, because if you made a market call based on the politics, you wouldn't be eighty two on crude. I mean, I mean freeing this out. There's a trading range seventy eight. No one believes in that. And then as John mentions, there's a migration back to a hundred, no one believes in that. How likely is it? Look that's an outside chance. I don't think the hundred

is a base case at all for us. The base case has always been around eighty dollars next year for the simple reason that a demand is going to go back to pre COVID levels b we've even got around coming back. We've just put out a noteying Iranian production will probably come back by more in the second half of the year. We've always been very clear on the timeline that it's not going to come back before June.

But with the Biden presidency or administration rather engaging or likely to engage with Iran, volumes will start to come back. But then once Iran is back, there's very little specupacity in the system. OPEC will continue to bring oil back to the market, but no OPEC supplies which nobody talks about. There's no investment. Everybody is going after net zero. Everybody wants to be in the green age or has to

be guided by the Green agenda. If there's no investment in the upstream, where is the marginal barrel of supply going to come from once OPEC has exhausted whatever it can bring on to meet the increase in demand. That's the question for next year. And rates always great to catch up come back, saying rate a cent of energy aspects down the CREWD market. Let's go to serious economic matters.

Ethan Harris with the Bank of America running all of their economic research Ethan, I like how you and Michelle Meyer do the math. Four percent of g d P plus nine percent of g d P is a Larry Summer's impulse of g d P. Is that too much? Well, it's unprecedented. I mean if you take the two packages together, the one past December and one on the table, now, it's as big as what we did last spring when the economy was in free fall, when the unemployment rate

was fourteen point three percent. Now the unemployment rate it's only six point three. Just these two packages, not including all the stuff they did last year, just these two packages are much more than double what the US did in two nine recession. So um, I've described this as clients as it's like the big gulp at seven eleven. I would know about that. Well, this is like drinking two of those Okay, Well, Ethan, you know on the

big gulf. I I look at the other debate, which is an open and closed economy, and that some of the economic templates of the past are much more closed economies that are not international. How does that fiscal stimulus affect America if we are much more an open economy? Now, well, I mean when you put that kind of demand stamulus in the economy. And by the way, it's not going

to show up right away. It's going to show up when we reopened the service sector and all the money that people have been holding in their bank accounts goes out into spending. But yeah, I mean a lot of it's gonna leak overseas in terms of stronger trade. Um, it's gonna provide a modest boost to go global growth, but you know, we still are relatively closed economy. It's going to be very service focused spending. All the stuff that we've been unable to buy for a year now

that will boom. Uh, and that's mainly domestic spending, So it's it's going to spill over, but most of it's going to stay at home. Even how much is two thousand and nine a correct comparison that we should be looking at, both in terms of the of the nature of the shock as well as how quickly the economy accelerated afterwards. In other words, a lot of people said we didn't move quickly enough, and that's why the recovery took so long. This time, we want to fix that mistake.

What's your take? Well, I think that that it's correct that there wasn't enough escill stimulus in two thousand nine, and and we knew it at the time. We knew that uh six percent of GDP stimus was inadequate given how massive the recession was. And the other thing we knew is that they gave up too early. Um, they stopped doing additional fiscal stimulus when the unemployment rate was still over nine percent, and there was no follow through at all. But I think people are looking back at

that and not taking the lesson right. We're not waiting, We're not sitting here at nine percent unemployment. We're down to six point three and we haven't even felt the effects of the latest package. So this is um a very strong reaction to what was a policy mistake back in two thousand nine. The other thing I would point out is in two thousand nine, one reason you had such a crummy recovery was because he had a banking in real estate crisis. And we know that those crises

always produced weak recoveries. There's a lot of economic historians have written about this. This is different. We don't have a banking real estate crisis. We have a healthy banking and real estate sector. So once the economy gets going, you're gonna have a more normal recovery with or without the stimulus. So the two thousand nine analogy sounds great as a talking point, but when you look at the details of it, it's hard to justify. You know, it

seems like an overreaction to that historic experience. So are you saying even that you think that the high asset prices that the FED is allowing to continue actually help them achieve their goal of lower employment and higher inflation. Well, I mean, you know, we've got both the FED and physical authorities with their pedal to the metal. It's like you've got two accelerators and no break. Um, So that's

gonna be very stimulus to cap stimulustic to capital markets. UM. I think the danger here is not in the immediate the immediate future, but more you know, at what point do we kind of say, okay, now we need to apply some breaking here. We were starting to get a little bit of inflation in the system. Um, how do the markets adapt? Yeah, the sad starts hiking. Um. You know,

I think it makes more sense to go slower. I think ethan Over the last year, there's been a huge conversation about how Wow the Treasury is working with the Central Bank in the UK, in Europe, in the United States as well, but there's some tension there too. The objective of the Federal Reserve has been to divorce asset prices from fundamentals that have been successful. That was a

policy objective to boost asset prices. And we know what that's at the expense of that's a tackling wealth inequality. Wealth inequality now is a target of the Treasury. How do you track that and how did they execute? How are you thinking about that issue at the moment? Ethan Well, I think that I think tackling inequalities an extremely important and I you know, I think it's a It's a very important policy objective. The question is how do you

do it right? I mean, you you a dress it through edge Haitian, through income distribution changes, you know, progressive tax system, um. You know, those are the areas where you can affect performance at the low end without overheating the economy. I don't think you address any quality by creating a huge boom that eventually creates inflation. I think

that that's not a lasting solution. The solution has to be education and redistributive tax policies, and we all can agree or disagree on that from a political point of view, but those are the tools for the task, not not massive monetary and fiscal standards. So even from your perspective, then it sounds like that you would be in the campillarity summers on the composition of this probagram that's been put together down to d C. Yeah, I agree that

they've they're pushing a little too hard here. I think that the UM I think that we need. I'd love to see what the economy looks like two quarters from now, when we're reopened and people have been vaccinated, UH, service sectors coming back, UM, and then you can figure out whether you've really done enough or not. UM. It doesn't mean we don't need any fiscal stimulus. We need to

address the most hurt parts of the economy. But giving stimulus dollars to people who are doing well only goes into bank accounts and also comes out the other end when the economy recovers. What is your GDP called twelve months forward? I've really lost sight of it, Ethan. It's because right, so we've got growth this year six percent UM. The Bloomberg consensus is four point one right now, so we think consensus has got a lot of catching up to do. And then we've got four and a half

percent growth next year. But those are some that's based on our assumption that only half of the one point nine trillion would actually be enacted. UM. If the whole thing gets enacted, we're gonna have to revisit those numbers UM. And by the way, that's the fastest growth um since four coming out of the mass of recession. So we've got a very strong growth coming out of this this recession. Eighthan wonderful to catch you sn cluse Ethan has that

a Bank of America. Thank you said, thanks for listening to the Bloomberg Surveillance podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keane before the podcast. You can always catch us worldwide. I'm Bloomberg Radio.