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This is Bloomberg Surveillance. Alongside Damian Sassaur and Gina Martin Adams. I am Matt Miller, Tom John and Lisa are on assignment today in Jackson Hole, head of our special coverage. Let's get out to Jackson Hole. Right now, Bloomberg's Mike McKee kicks off our coverage with former Saint Louis FED president Jim Bullard, now at Purdue. Mike take it away.
Well, good morning everybody, and good morning to Jim Bullard. You know it's a tradition here at Jackson Hole that we start our coverage with an interview with Jim Bullard.
Every year.
We come out at six am in the morning and Jim joins us in the cold. Jim left the Fed, but We're not letting him get away. He's joining us now from Purdue University, where he is the dean of the Daniels School of Business. Welcome back to our show, Jim, even if you're not here in person.
Well, I'm glad to be here. And I wore my Jackson Holt coat in solidarity with the cold weather that you have to endure every year when you're out in the mountains there.
Well, I offered you coffee. I just want everybody to know that, but you didn't want to come get some the first question, and I'm not the only person to wonder this, and I'm sure you know this is why you left the FED when you did and why you took this job that you have now.
Well, this is a great challenge for me and for the Mitch Daniel's School of Business. We're going to get much better. We're already good, but we're gonna to go to great And I thought it'd be a great opportunity. I have been in the FED for fifteen years as president and longer before that, so my time was running out. So this is a great challenge later in my career, so I'm really looking forward to it.
Well, you recently moved.
So you still, i'm sure, have a lot of economics and monetary policy on your brain.
Let me pick it a little bit.
And ask you what you think of the economy at the moment if you were still trying to decide whether you would vote one way or another. Are we getting signals that give you a strong view one way or another?
I think the biggest question right now is the reacceleration in the US economy. Atlanta Feds GDP now showing substantially above trend growth for the US economy in the third quarter. That's following higher than expected growth in the first half of twenty twenty three, and for that matter, in the second half of twenty twenty two. So I think that those that have been predicting imminent recession are having a
lot of trouble here. It doesn't seem to be happening, and this reacceleration could put upward pressure on inflation, stem the disinflation that we're seeing, and instead delay plans for the FED to change policy.
How are we going to do?
Let me separate those questions out a little bit in terms of inflation absent the growth level that we have at the moment, and of course.
That's just a very early read from the Atlanta Fed.
Absent that would you be thinking that inflation would re accelerate anyway based on what you've seen in the economy.
There's some talk about base effects fading and going the other way during the second half of the year, So we'll see if that occurs. You know, I like to look at the twelve month numbers because they rints out some of the seasonal effects, and so you could get at least a pause in the disinflation or even a little bit of reacceleration. I think that would suggest a higher rate profile for the FED than otherwise, So yeah, it could happen.
Well.
Chairman Powell and the other members of the committee have been very careful in what they've said about additional rate increases because they seem to feel they're pretty tight right now and they want to make sure they don't tip the economy into recession.
How great a danger do you think that is?
Yeah, I don't know. I think that committee should take a little bit of a victory lap here. I mean, the unemployment rate is three and a half percent, and we were very aggressive in twenty twenty two and into twenty twenty three, but the real side of the economy has been growing faster than potential. Labor market is still very strong, that should consumption, which should continue to proceed
a pace here in the second half of twenty twenty three. So, and in the meantime CPI inflation headline CPI inflation was actually on a twelve month basis was nine percent at one point, now three percent, and the core measures are coming down as well. So it really looks like the twenty twenty two policy, including seventy five basis point hikes four meetings in a row, has a good chance of success. You never know, but it seems like it has a
good chance of success here. So if there was ever a soft landing, taking six percentage points off the headline inflation rate without an increase in unemployment would sound like a soft landing to me.
Well, the argument some of your former colleagues make about not raising rates further is that we have long and variable lags that are just beginning to hit the economy. That twenty twenty two rate increase path is only just beginning to hit the economy, and we have seen some of the sentiment indicators suggest that we have seen manufacturing
drop off. Do you think that we really need more rate increases or should we wait and see if these lags are finally starting to hit and this speedy economy will slow down at last.
Yeah.
I don't think that the long and variable lags are quite what they were when Milton Freeman first talked about them decades ago. I think a lot of the transmission is much faster than it was at that time. I would point to housing as one of the prime examples. The housing market basically came to a stop in the spring of twenty twenty two, and at that point, the
Committee hadn't actually done anything. The policy rate was still not very far from zero at that point, but markets anticipate what the Fed is going to do, and so you've got a big impact in the spring and summer and fall of twenty twenty two on the housing market. So that's an example of how markets pull forward the policy of the FED, and I think that's more prevalent today than would have been in the sixties or the seventies. So I think these long and variable lag estimates are
a little out of date. You have to think about transmission coming much faster than it would have during that period of time.
A couple of newspaper stories, and now Wall Street is talking about is our star and whether the Fed is going to be adjusting its estimates. Two questions, One, what do you think it is? And does it tell you anything? And the second question is is it really relevant to policy at this point?
I think it is relevant, but we don't have very good estimates of this number. I think Chair Powell has said we really don't know.
Oh.
I think that was one quote from him on our Star. So it is an interesting debate, but you probably can't make too much of it because the estimates are so uncertain. I do think it matters, though, because people want to have some idea of where they think they're going.
In the medium term.
Well that's my next question is where do you think we're going in the medium term. You've got some people who think John Williams, a New York FED president, that our star, the neutral rate of interest, let's put it that way, is going to be somewhere where it was prior to the pandemic. Others think we've moved into a new regime, to quote the old Saint Louis FED President Jim Bullard, and we're going to be back to say, the nineteen nineties versions of interest rates and growth rates
and inflation rates. Where do you think we come out of this pandemic?
Yeah, I think the probabilities are that we are in a new regime that'll be a higher interest rate regime. It'll be more like the nineties than we're used to in the last two decades. And the reason I say that is that inflation is above target today. Core inflation is likely to be sticky and come down rather slowly, and the rule of thumb would be that the policy rate has to be above the inflation rate in order to continue to push inflation back toward our two percent target.
So you would expect from those considerations that interest rates would be rather high over this timeframe going forward over the medium term, more like the nineties, less like the twenty nine to twenty nineteen period where you had inflation below target and interest rates pinned down at low levels. So I think we have probably switched here to a higher interest rate regime with higher nominal Interesting. Now, I wouldn't say about the nineties. You and I have talked
about this before. The second half of the nineties was actually one of the best periods for US macroeconomic performance. So you know, maybe it's a good sign for the economy. The economy can boom even with a higher nominal interest rate environment.
Well, we'll hope you're correct.
Jim Bullard, the dean of the business school at Purdue University, the Daniels Business School, thank you for joining us and helping us kick off once again our Jackson Hole coverage.
Matt Michael McKee, thanks very much for that, and thanks also to former Saint Louis FED President Jim Bullard reer in for Tom John and Lisa. They're out doing some reporting at Jackson Hole as well, and there could be some really big market moving speeches out of this symposium, or maybe not. Let's ask Michael Darla, chief economist and
macro strategist Roth MKM Partners. Michael, you know, what do you expect from the Fed in a week when a lot of people have been saying and videos may be more important than j Powell's speech.
Thanks for having me on, Matt. Well, that's clearly been the case in terms of the equity market. As we've seen, all eyes are going to be on Powell tomorrow at ten am. You know, last year it was very short, very blunt, very to the point. But the FED has certainly moved quite a bit, you know, over the course of the last year and a half. So I don't think Powell's intent here is going to be to make
new news. I think, you know, essentially, the FED is getting close to where it thinks the policy rate is above neutral, but their eyes are on the macro data. And you just heard Bollard there essentially saying if the data looks like it's above trend, the Fed's to believe that the job is not quite finished. So I really don't think Paul is going to come out and make some kind of declaration that the FED is done tightening.
I think they're going to take it meeting by meeting, which is, you know what they've.
Been saying, Michael rising, real yields are a negative for risk assets. Here we have the US ten year real yield approaching ten percent. It's jumped something on the order of fifty BIPs since July. Just how much higher can real yields go from here?
Yeah, that's a really important point. They could certainly go higher with tighter FED policy. Real rates can go up, But you know, consider the fact that the last period in which we had ten year real yields around two hundred basis points spanning from two thousand and three to two thousand and nine. The forward PE ratio on the S and P five hundred was right around fifteen and
we're back above nineteen times now. We were at twenty times forward estimates earlier this year before a pullback started. So I think that ultimately is going to be a hurdle for the equity market. There is competition now from the bond market, and there's a lot of competition from cash.
You know.
We published a piece yesterday that took a look at the treasury bill yield relative to the earnings yield on stocks, and T bill yields are now higher than the earnings yield on the S and P five hundred. That's actually fairly rare historically, and when it has occurred, the equity market is tended to fall into fairly serious corrections or bear markets. It's going to be impossible to time. But the point is a good one. The higher the yield,
the lower the PE ratio. And we have pretty elevated PE ratios now in the equity market, even on a forward looking basis.
But this is great for you know Tom Keen is in a triple leverage to all cash lot, right, so he's been doing very well. This is when Gina, Michael's going to talk about the equity risk premium or the negative equity risk premium, which you know, it's difficult for me to get my head around that well.
So the thing I think you want to focus on with respect to the equity risk premium is most analysts are going to look at the PE on the S and P five hundred and compare that to some version of a yield or a cash yield, as Michael does in some of his notes, And I think that the missing link there is when you look at the PE of the S and P five hundred, you're really looking
at a distorted pe based upon seven stocks. When you look at the rest of the broader equity markets, you look at global stocks, you look at small cap stocks, you look at the X seven s and P five hundred, you actually find the risk premium is much closer to long term average. But you do have these distortions which are creating this really bizarre environment for investment. I mean, my question to Michael would be where are we going
to go with this? Michael Are we going to see some rotation then as a default of the equity risk premium or is this just to sell all stocks because you're selling the top seven.
Yeah, that's a really important point and a great question, and I think you know, the answer is it really depends on how the business cycle fares from here. So we have been seeing the rally broadened out, and we're hearing the word soft landing and even goldilocks now fairly frequently. And so it looks like a soft landing in the sense that the economy has slowed to about trend, inflation is coming down, and that's starting to catalyze a lot
of confidence that will avoid a recession. And there's no recession happening now. We know there's a recession on if the unemployment rate is lifting, and that has not occurred yet. But I don't think we're quite out of the woods in terms of, you know, looking out over the next year. I still think the probability of a recession is quite high, just because we dodged one in the first half of the year. Q three looks like it's shaping up pretty well so far. I think it's a bit premature to say, Okay,
the coast is clear now. So if we do end up with a recession hitting some time between now and say the end of next summer, you know, I think that's going to be a difficult environment for the equity market, even you know, even given the fact that we've had these distortions by the seven stocks you've mentioned. The rest
of the market certainly doesn't look that expensive. But an environment where top line growth is weakening and potentially e've ben falling and you have that pressure on profit margins, I think we're going to have difficulty and risk assets and not just equity markets. I mean, the high yield market looks insanely expensive here, so I wouldn't touch that with a ten foot hole. The triple levered cash fund met that the top is a pretty good way.
To go here.
He's done very well, but he's avoided bitcoin from I have to say, from like six hundred dollars when I first talked to.
Him about it.
He could have made a killing in it. I want to ask about, getting back to Jackson hole, how restrictive the FED is, because you point out that we have obviously an inverted yield curve. We're seeing a shrinkage and money supply for the first time and who knows how long, and that typically indicates a recession is coming. Both of
those things. On the other hand, you know, Neil Dutta the note after the minutes, put out a note pointing out something that Damien was bringing up earlier as well, which is that we have unemployment at three and a half percent, we have growth that looks like four percent right now. So how restrictive can the Fed really be?
Yeah, I think that's the critical question for the Fed. If they're looking at you know, the coincident data month by month, week by week, If the data looks like it's coming in above trend, the Fed is going to assume that whatever the policy rate is, it's not high enough. Right.
So that's why there's still a question about whether they raise rates again and whether they're really done in the Future's markets have been, you know, starting to price in at least one more rate hike although it's you know, low probability. So if you continue to get hot data, then the Fed is just going to keep at it because they don't you know, they will admit they don't really know where the so called called our star, the
equilibrium interest rate. If you think about what they've most of them have been saying, the fo MC voters since last year. They're talking about getting to a restrictive stance and holding there. And if you ask them to define, you know what does that mean. It means that activity is coming in below trend. So if that's not happening, that's going to keep at it until it does happen. And you know, in my mind, that's actually the risk
to the to the business cycle. And you know that that reinforces the message of the yield curve in money and some of these longer leading indicators that tend to weaken well before recessions hit. The problem is, you know, there are long and varied lags what's impossible to time, and you can have these rip roaring equity market rallies, even if they're narrowly driven, leading an economic cycle. We
saw that in six seven. We also saw the eighty nine to ninety, so that one was before most of our time here on the panel.
Absolutely for all of us here, definitely way before our times. Michael, thanks so much. Michael Darta there of Wrath MKM talking to us about rates.
Springing.
Max Kattner right now, chief Multi Asset strategist over at HSBC. He joins us live out of Copenhagen. Max, let me first get your take on the big news of the day, which is yesterday's and Video earnings report. I thought expectations were so high it would be tough to beat, and yet they did it.
Yeah, good morning.
I think, look just like we've had before, right, there's really nothing bad about that report, and it's going to be you know, it's going to be pretty interesting how the stock opens. I guess we're going to go towards a new all time high. I guess in terms of the market sentiment, and it's a complete switch from what
we've seen last week. However, I would also say in terms of the broader market sentiment, not just in video, not just AI, but if we look at the broader market sentiment, that's clearly become.
A little bit more bare over the last you know, the last two weeks or so.
When we look, for example, at survey based sent and sentiment, look at the AAII survey, look at several other indicators in general, they've become a little bit more bearish. And that is good news, right. That means that, you know, if you get a bit further further dips in US equities. That definitely is really territory to buy on dips.
Max.
You've been pretty constructive and talking about buying on dips now for a bit of time. Is it more than just sentiment. Talk us through your theory or sort of your justification for getting a little bit more bullish as we approach the end of the year, because it seems to stand out as many people have sort of gotten a little scared off by what we've experienced over the last month.
Yeah, I do think.
Look, I do think there could be a few further deps now in the next week or two, right, or with Jackson Hall, you guys just mentioned treasury supply, right, If one or two of these auctions tail a little bit, yeah, fine, that may be bringing a few further dips, but those steps have to be bought, right. It is number one, the sentiment side of things that we've just talked about, but it's also the fundamental side, right, Like you before mentioned the broad based earnings recovery.
Let's remember that.
We've just had the second quarter in a row where average earning surprise factors have picked up again, where the earnings b trade has picked up again, both way above tenure averages and pre COVID averages. So that's pretty good, right, And it's also really when we look at the strength of the US economy overall, that is pretty broad based as well, right, whether that's the consumer, whether it's easier
financial conditions compared to a year ago. And indeed, if we look at some of the leading indicators of the manufacturing industry, right, some of those leading indicators, let's say, like regional FED surveys.
Even the ones that we've got for August.
Already, they're pointing towards perhaps some turning points, some early sort of turning points, even in the struggling manufacturing industry in the next couple of months.
Fundamentals don't matter anymore. Come on, you know that. I mean, let's sift back to sentiment. Let's shoot back to positioning.
Let's focus on seasonals, the notoriously weak September October period. I mean, should we be even remotely thinking about buying the dip into that or should we be looking to hedge up, should be looking to cover our bets? I mean, look, one of the features of this weakness we've witnessed over the better part of the last few weeks has been a stronger dollar, and you know, my concern is that, you know, what does that mean for US equity earnings?
So on the second question on the stronger dollar, but let's remember that the dollar is still significantly weaker compared to.
A year ago.
So the fact is that when we look at the year of the year change of the dollar that's typically quite well correlated.
With earnings revisions of the S and P.
The S and P still has a surprisingly significant degree of foreign revenue exposure. So that week of dollar compared to a year ago actually is now coming through now in Q three earnings and Q four earning, So that helps.
That's number one.
Number two on the seasonals, I absolutely hate I did test seasonality, right, seasonality, to be perfectly honest, if you do any kinds of studies over the last sort of ten, fifteen, twenty years, if you adjust them for the big events, right, things like you know, nine to eleven, if you think
about two thousand and eight, right Lehman Brothers. So those sorts of things that frankly didn't really have an awful lot to do with seasonality, then even in the last twenty years, seasonality is gone right, So the seasonality gains that people were able to harvest, they really stopped with the surge and computing power, which I guess brings us back to n video, but it really really stopped really from the end of the nineties beginning of two thousand.
Since then, seasonality hasn't really worked right.
And also they se yeah, let's remember right, you would have thought, oh, let's sell in May, and what happened was that the rally took off in June and July.
So even this year, seasonality didn't really work.
Max, great talking to you this morning. Thanks so much for joining us. Max Keattner of HSBC. Diana Amoa, CIO of Long Bias Strategies at Kirkhus Waald Asset Management, joins us now to talk about everything that's going on in these markets. So Diana really appreciate you coming into the Bloomberg Surveillance studios this morning. What's your view of what
we see going on here? With a couple days ago, we were at four thirty four on the ten year and it didn't seem to dissuade everybody from still keeping these equity markets at relatively high levels.
So I think what's been supporting equities despite the higher rates that we're seeing is actually the earnings I think this last earning season especially surprised. We've seen significant revisions in some of the key sectors that are big components of the indusices, such as in the tech sector. That is actually giving investors a degree of comfort that companies can still generate profits even with higher funding costs.
And you are seeing across the world some central banks start to pivot to sort of more dubbish policy already. Can you talk about the implications of that and how you see that playing out over the next six to twelve months.
Indeed, So what we're seeing right now is some of the specific inflationary trends that we've been seeing into last year have turned into strong disinflation. And I think markets underappreciate just how synchronized the disinflation we're seeing globally is similarly to when we'd started seeing inflation pick up and the developed markets we're ignoring the signs, thinking it was em specific or transitory. I think the extent to which
we get global disinflation might catch markets by surprise. So that's the one thing that has been a big turn, and especially in the context of growth outside the US is actually looking quite lackluster. We've seen the pmis out of Europe, We've seen the data out of China, We've
seen data out of specific emerging market economies. Whether you're looking at things like retail sales in Central and Eastern Europe, credit growth across a number of key economies, all of these are points to tighter financial conditions starting to hit growth and inflation is actually off the highs. And we're seeing this inflation which means central bunkers can start to cut rates. And indeed, over the last few months we've
seen Brazil cutting rates, Chili cutting rates. We expect we might see polar next as one of the major emerging markets to start easing rates as well.
So are we moving into a world then, as you correctly identified where emerging markets lead developed markets on the inflation front, are emerging markets likely to lead develop markets on the central banking front through the disinflationary phase? And then how do you structure a portfolio and an environment where emerging markets are potentially leading developed markets. That seems a very different sort of investment construct than that which we've lived in for much of the last twenty years.
It is indeed, and I keep saying this over and over for the first time, you know, the inflation dynamics in EM that we've experienced over the last few day decades are actually coming in as an advantage to policymakers in EM who are early to hike, and they hiked aggressively, so they got to their time rates much faster and have been on hold for long enough. So keeping monetary conditions tight enough that inflation is responding, consumption is actually
slowing down across a number of economies. In that context, portfolio construction would argue that if there is a chance that we might have recession in some of the key economies, you need to have some duration in your portfolio. And I know, given the context of the price action we so in August, duration seems to be going in and
out of fashion. But ultimately we think real rates are high in a number of key EM economies and policymakers will be responding by cutting rates irrespective of what's playing out in the rest of the world, and that gives us comfort in seeing EM as a good diversifier of portfolios at this point in the cycle.
Diana, back in June, you participated in the byside panel of our Emerging Markets Investment Conference here at seven thirty one last Bloomberg Headquarters. And you know, one of the things we debated was the shift into a multipolar world, where you know.
Countries have to take a position. Are they on the side of the US? Are they on the side of China.
Now we see China trying to expand its kind of bricks plus model, We see the US making forays to South Korea and Japan.
Talk to us a little bit about those.
Countries that don't have to pick a side. Do you believe those countries should command a premium on the part of investors.
So it's interesting that you bring that up in the context of we have the Brick Summit taking place right now. We had China announcing overnight that they're going to set up a ten billion fund to support development in certain parts of emerging markets and to help with the supply chain integrity. I think that's a theme that's here to stay.
It's a longer term theme. We're seeing countries across the board really thinking about where the supply chains are, where the key mineral resources are, and how to secure those. And so as a result of that, you've seen near shoring friends sharing become much more of a conversation going forward.
You've seen countries moving more to ally themselves with non traditional allies, and you've seen other players such as the likes of India Mexico become quite strategically important to the likes of China as far as India goes to Mexico, to the US as far as you know their manufacturing
hubs and how they're setting up their supply chains. So the near shoring is and this multiplarity is happening in place, I think investors will actually think about diversifying their portfolios from being too exposed to either China or the US. In the context of if you do have a geopolitical fragmentation, and so you start to look at the more neutral countries, India being one that has benefited from this geopolitical splintering and actually look set to continue to grow quite rapidly,
particularly in manufacturing over the next five years. So those countries should command a premium as this trend continues to go forward.
You mentioned China, and you know that's so critical from the part from the perspective of a foreign investor. You know, we've seen roughly eleven billion dollars exit the Chinese equity market in the last two and a half weeks alone. In the set quarter, we saw foreign direct investment in China, you know, down to its lowest levels pretty much on record. As a offshore foreign investors, a US dollar based investor, how do you approach China in the current environment.
One needs to understand the policy direction of China. I think what makes it difficult to do direct investment in China. It's just the uncertainty as far as regulations go, the geopolitical uncertainty, and the tensions domestically. So this is an economy that looks like it's decelerating and continuing to accelerate.
You have sporadic bouts of unrest coming through, and then you have flare ups in key sectors of the economy, whether we are talking about the financial sector with the shadow banking issues, we've seen this last couple of weeks in the commercial real estate space, which is key for business, and in even domestic real estate markets, which are key for the wealth effect for the consumer. So from an equity perspective, it becomes quite difficult to look at the
traditional sectors. It's not to say the interesting stories underneath the surface, whether you look at tech and the lips that China is making their own technology, et cetera. But from an aggregate portfolio perspective, direct investments become hard. So the second layer then you have to think about who benefits outside China, which countries are likely to benefit if we do end up getting the old style stimulus. So let's just build a bunch of roads, buildings, let's stimulate
the property sector. Commodity exporters will benefit, so think about em commodity exporters. China has now said the reopening group tourism to Europe and the US. They'd already started that movement in Thailand and we see that in the recovery tourism in Thailand. So that's another proxy of thinking. You know, if we are going to get more travel, then those are places that could benefit. So there are ways to position for the China story without necessarily direct investment in China.
Diana, thanks so much for coming in.
Really great to get your perspective, especially there on emerging markets. Diana a Moa of Kirkoswold Asset Manager.
Subscribe to the Bloomberg Surveillance podcast on Apple, Spotify and anywhere else you get your podcasts. Listen live every weekday, starting at seven am Eastern. I'm Bloomberg dot Com, the iHeartRadio app, tune In, and the Bloomberg Business app. You can watch us live on Bloomberg Television and always I'm the Bloomberg Terminal. Thanks for listening. I'm Tom Keen, and this is Bloomberg