Surveillance: Walsh Says Economy Moving Forward

I'm very place to say on TV on radio. We're joined now by US Secretary of Labor Marty Walsh, to get the White House response to these tremendous jobs numbers that we've seen so far this morning. Mrs Extra great to have you with us this morning. Let's get straight to it. Demand has been stellar for a while now.

We've been waiting for the supply to turn up. A youth confident was saying scientific that with this job's report this morning, we certainly I mean, I think adding four million jobs since the inauguration of President Biden, an average of you know, eight hundred thousand plus jobs over the last three months. We're seeing our economy were moving forward.

We're seeing people going back into all sectors. It's not just leisure and hospitality, although that was our biggest game again this month, but we saw people in education and uh government education and also in manufacturing, so we're starting to see different sectors getting busy as well. Mr Secretary, What do you think is driving those supply constraints starting

to ease just a little bit? What do you think it is driving that some people have pointed put towards the expired unemployment benefits in some states half the states across this country. What do you think it is? I think there's more people vaccinated, more people feel uncomfortable. Now. We obviously have to keep an eye on the delta variants and where that takes us. But I think people are feeling safer going out when you go to a restaurant,

more and more people coming out. Here in Washington, I see more and more people doing doing on those tour buses. So people are starting to travel. We were seeing more travel in the airport. So it's comfort, it's it's people feeling safe. Seventy of the American population has at least one vaccination shot. But we have to we have to be very cognizant of the delta variant and make sure we don't let that spike and get out of control.

A higher wage is making it happen. Do we need a higher price to bring that supply back in line with demand? Four percent wage growth? Mr? Secret do you think do you think we do we need to see more of this? I think higher wage wage growth is good. It's good for the American worker, it's good for people going back to work. I think in some sectors we're definitely gonna need to see higher wage growth for people

to come back to work. But but I think where we're headed right now, I mean all signs are incrementally going in a good positive direction. Companies have starting to respond on the vaccine front, Tyson Food requiring all staff to be vaccinated by November first. We heard the same from the United Airlines. From your standpoint, is there something you and the administration support companies mandating vaccines for their labor force? Certainly the President said he supports companies when

they put those mandates in place. H He's taken the different We're taking a different approach to the federal government. We're asking people to get vaccinated, and if they don't get vaccinated, we're going to do lots of testing. So anything that we can do to encourage people to get back into the workforce is important. I think there are people that don't want to get vaccinated because of whatever

reason it might be. Some people have good, legitimate reasons, but the majority of people that aren't getting vaccinated, it's a political thing, and it shouldn't be a political political issue if it's a political thing. So why do you think minority groups in some cities like Washington, d C. The city you're in, like New York City, Why some of those minority groups have not been getting vaccinated? Why those vaccination rates are so much lower? Is it just

politics or is something else happening? No. I think in the community of Carlor, particularly in urban areas, it's a distrust in the healthcare system over generations. I've seen it when I was Mirror Boston, and we had to do a lot of work to go out there and build trust in the community. People of color, particularly African American community, felt in some cases abandoned by hearts of the hospital systems over years. So we have to do more work

there to encourage people to get vaccinated. And that's the issue at playing right now. So, Mr Secretary, I wonder what your thoughts on the following might be if we're in a position now where large companies are starting to say if you're not vaccinated, you can't work for us, where cities like New York is starting to say if you're not vaccinated, you can't dine here when you and I buy both. Now, the vaccination rights of minority groups just aren't high enough. You worried that they might be

frozen out of this economy. You know, I'm concerned, but we But it's it's also outreach and marketing. We have to go out into the communities and talk to people

to make sure people are comfortable with the vaccine. So you can't just which really say, in certain communities in America, like for example, in Boston, the communities of color that you know force people to get vaccinated, we have to go out and do an educational component of whites and point to get vaccinated, just like we had to do an educational component at the very beginning of the pandemic to express why it was important to wear masks, fizzicle distance,

washing hands, and do all of those things. So what are you doing right now to make that happen. What does the outreach look like? Well, I mean I think a lot of it. It's gonna be up to local governments. I think that that you know, we're gonna be working with mayors and states around the country about that to reach out there. And I know that the COVID Task Force at the White House is working on it as well.

Right now. I haven't had a meeting with them in the last couple of weeks, but I know that they're working on how do we deal with this issue of the people in America that have decided not to get vaccinated for whatever reason they are, How can we encourage them to get vaccinated? So it's still it's still work in progress. Do you think we need to get past this lazy media narrative that it's just politics, that there's much more dom and gone so that one more time

I missed that. Do you think we need to move past the lazy media narrative that this is just politics, that there's more going on in this country. You touched on the distrust of government that's a lot more pervasive than I think some people are willing to acknowledge. MS the Secretary, would you agree, Yeah, there's no question about it, And I'm acknowledging it because I saw it first hand as the mayor of the City of Boston. But but I do think there's a lot I think a lot

of this also has to do politics. I think that that you know, when you look at some parts of rural America, you look at some parts of what's happening down in Florida, people refusing to get vaccinated. Uh, it's not a political issue. Getting vaccinated is not a Democrat or Republican issue. It's not a progressive or conservative issue. It's about taking care of yourself and your family and your livelihood and keeping yourself alive. So I wish it

wasn't political. It shouldn't be political. Uh, wearing mass shouldn't be political. It's has nothing to do with politics. It's about your public health. It's about keeping yourself safe, and ultimately it's about keeping our economy moving forward and keeping our country moving. Mrs Extra, I know you've got to keep moving. You've got a busy morning this morning. Thank you for being with us. We appreciate at the U S Secretary of LABE that Manti Walsh from New York

City for not audience worldwide. I'm ready out on TV this as Bloin bug Jeff Rosenberg joining with black Rock and what's so important here is so holistic and fixed income and doing wonderful work in multi strategy as well. Is it a regime change today, Jeff Rosenberg? When you see the revisions, when you see one point eight eight one non firm payrolls over sixty days, does it shift

the black Rock view? You know, it's a It's a really good question, Tom, because I was thinking the exact same thing that you know, we've had a lot of kind of negative surprises, you know, focused really on the delta variant. You know, it's important to remember that this payroll report is really pre the CDC mask wearing change in guidance. It doesn't really incorporate some of those more recent changes yet to the extent that we follow the pattern that we've seen in India and the UK where

the variant surges, but it's not a permanent surge. You know, we could be seeing kind of the peaking of the negative news that has has been really about the second derivative and the slowdown, and that's manifested itself in a

pretty protracted rally and interest rates. You know, since interest rates peaked at the beginning of March, I think the next focus here, and you were just talking about it in terms of average hourly earnings, Mike McKee spot on, it's really hard to digest and and decouple the mixed shift from the underlying data. But it's a strong print even with the mixed shift that Mike was highlighting, and

that's really going to turn the focus on inflation. If we add labor market strength, and let's be clear, this is a very strong report across all metrics. There's there's very little that you can point to here that's disappointing. And if we add to that, you know, some signs of a broadening out from that inflation that we're seeing in the in the wages here, you know, this could be that regime shift in terms of the direction that we've had on interest rates that you were asking about, Jeff,

if the Fenent May team was tomorrow, what would I decide? Well, I think you hit it, or someone talked about the taper discussion. You know it's important here. The Fed is very focused to separate the interest rate tightening path from

the tapering discussion. And so when you look at that bond market reaction and and earlier, you know, we were looking at talking about the two year versus the back end of the curve, still a pretty muted response in the very short maturities of the treasury market, the actions in the back end of the curve, and that tells you that, you know, the market is separating the path of tightening from the pace or the calendar on tapering.

I think, you know, if anything, it pulls forward, maybe tapering, but the Feds being very clear they want to avoid the taper tantrum. And remember the taper tantrum was about the market conflating tap tapering with earlier tightening. This is not going to be an earlier tightening, but it could be an earlier tame And Jeff, that's exactly what President Kaplan tried to do this week, aggressively de link kiss commentary about que from any kind of idea about hiking

rates anytime soon. Mike McKay, I want to bring it back into the conversation. It is there reason to believe that this can persist, These jobs gains can persist into September? And was this a stress test for the theory that if you remove additional unemployment insurance, the workers will show Some people have made the argument I don't hold a position here. I'm just wondering, Mike, is the proof of that this morning? Now there's no proof of it this morning.

We don't have data that show that. The research that has been done suggests there has been no effect from it over are all. In about two weeks, will get the state employment numbers and we'll see if any particular

states that cut off unemployment benefits see arise. But one thing that may be at work here, John, is that in the summertime, schools are never in session, so the daycare issue may have not been a problem UH in the sense of the seasonal adjustment that is done because they expect people to be out of the labor force to a certain extent taking care of their kids. And let me also mention that the education component that was

expected to add two jobs certainly did. UH. Jobs in education two hundred and twenty three thousand more in the seasonally adjusted UH area than in non seasonally adjusted so they've added two hundred twenty three thousand jobs to the total. Otherwise we would have had seven d and twenty thousand. So definitely a major seasonal adjustment question here. But UH, the issue is does anybody at the FED really care about seasonal adjustment and when are trying to think of

whether it's substantial additional progress. Jeff Rosenberg as an investor, what do you do with this information? Well, as we as we talked about, I think this is a possible shift here in the rate dynamic. You know, we we really have to follow this up with some inflation data if if that's gonna if that's really going to be the case. But just going back to the labor market peace, because you know, you look at what's driving the FED and and and market expectations around the FED, and it's

it's it's labor markets, and it's inflation. And on the labor market side, this is certainly contributing to accelerating mostly the taper discussion. I think the FED is going to do a lot to try to separate out taper from from tightening, and I think that's the main takeaway. I want to just add that there is some little piece of information here that participation rate did tick up a tenth.

That's quite helpful. Uh, We're gonna be focused on that participation rate as we roll off the rest of the unemployment insurance to see whether the supply side starts to ease and you start to see the labor market grow from that end. Jeff, does this report it change the balance of risks with respect to overheating in the economy or perhaps going into more of a sagflationary environment. I don't think it does. I mean, I think that you've

had that balance of risk. You know, look at Clarita's speech from a couple of days ago, and I think the balance of risk that he highlighted is is to the upside on inflation. And while that you know, there's certainly hawks and doves, both within the Fed and within the market. I think that balance of risk to higher inflation,

uh is something we had before the report. But certainly this report, particularly you know what Mike highlighted on average hourly earnings, only reinforces that risk on the balance of risks being towards higher inflation. John Farrow Jason Furman with a blister rain tweet He's never seen a more constructive report like this. He calls it a wonderful set of data. Neil Dutta is heated that this is a massive start to qu three. It's what we all wanted to say.

Jeff is going to catch up set Jeff Roisenberg of black Rock Gina Martin Adams now on the equity market consequences. Gin I see a churn to equities, but nevertheless a VIX that signals a bowl market. Neil Dutta at Renaissance suggests this is a bang up start to queue three.

How will that change the standard and poor's estimate game? Yeah, I think that analysts are still pretty cautious frankly on the outlook, and certainly what we've seen over the course of the last six weeks or eight weeks or so is a rotation into more defensive strategies really driving the market higher. So to the degree that we have much faster than expected growth and persistent growth, two things are

very important. We get both of those. Over the course of the next several quarters, we're going to continue to see upward estimate revision. So far, analysts are only revising estimates higher because second quarter numbers beat, and that's been consistent throughout the entire pandemic. Analysts are very cautious with respect to the outlook, and even though numbers are still going higher, they're only going higher because companies are telling

them that they should go higher. It's not that analysts are getting overly optimates. So if we continue to see numbers like this, we're going to see upward estimate revision all the way into how is use of cash changed or your gues estimate of use of cash. Robert Schiffman published moments ago of a forty billion share buy back up Microsoft. They've got the powder to do that, etcetera, etcetera, all of Bloomberg intelligence. How has use of cash changed

to sustain this bull market? Yeah, so so far this year it's all been it's been all about buy backs and M and A. Those two things have really been the dominant fact 's behind cash utilization by companies. So to degree that they're willing to part with their cash, which is still a limited amount of companies doing so, they're spending it on re engaging in buying buy backs that they cut in and increasing buy backs over time. They're also buying companies. We are seeing M and A

trends improve and we've seen that really since. What they're not doing so far, and I think where we have the greatest potential to sustain a longer term, faster pace of economic recovery is capital spending. Companies are still not parting with their cash in the most optimistic method, and that is spending it on future business potential outside of buy backs and m and A. So we've got to see capital spending improve. There's certainly capacity to do so.

Just to get back to average share of capital spending relative to sales, we should see capex rise twenty over the course of the next twelve to eighteen months. If we get that kind of figure, that's going to increase the confidence that analysts have of and certainly increased the durability um and the perceived durability and rate of growth that we likely are going to see over the course of the cycle. Gina is stick with us. We're just sort of parsing through the numbers. Michael McKee is looking

at the more granular aspects of this report. And when we talked about the dissonance between corporate earnings coming in so much harder than people had expected yet economic data lagging behind, perhaps the economic data just had and caught up with itself. Mike, what are the details, Well, we're looking at revisions to the prior months. You add in the numbers that were added back for June and May nine hundred and thirty eight thousand jobs were created in June.

We had thought that was eight fifty, so a significantly better report for the month of June and total one nineteen thousand over those two months, so job creation has been a lot stronger than we had thought it was. We had some reports we thought were disappointing. Turns out they weren't as bad. Meanwhile, Gina Martin that I'm still with us, and I'm looking at the action in the equity market in response to this, pretty much as you would expect. NAZAC futures a way underperforming the SMP, which

is basically flat. NASTAC futures are down a little less than a half a percent, or they were in just a couple of minutes ago. I'm wondering, from your perspective, if the NASAC can post gains through year end if treasure yields continue to rise, very unlikely. Um at least they will lag the NASTAC should certainly lag the SMP. Five and more cyclically oriented, sort of value centric segments of the market could rise faster in an environment where

rates are rising in inflation expectations are rising. In my mind, the recovery that we saw in the NASAAC in big cap tech in particular, over the course of the last couple of months, what's really about analysts and investors generally getting a little bit more cautious about the growth outlook.

So if you continue to have surprises on growth, continue to have surprises on inflation numbers, that trade depletes over the course of the rest of them of the year, Gina, Marty adamsyk you soone's too short of visit this morning. It's the only reason Jerome Schneider agreed to appear with us this morning was sure sureser. Max Scherzer killed it for the Dodgers in the last forty eight hours, striking out ten against the Astros. Schneider is so buffuddled by

West Coast baseball. That's the only reason we got him on air. He's dazzled. I mean, Jerome, it's fun from Seattle on down to San Diego. It's West Coast Baseball time, isn't it? It is? It is? Unfortunately, you know the angel through of our hit and myths, and you know you don't mention him. But but you know what I'll tell you. You know this, I'm a Yankee stand so I trade that have gone on. You know, it's uh,

it's very funny, funny. Hopefully that pizzas will come together in I can't I don't know, I can't continue this. I'm gonna just I don't know. Jerome, watch out. And I've got to say, folks, they went back and forth with Doug asked the Yankees, I left for dead, and Jerome, You've got to admit with the trades, this is gonna be fun. You know, we always talked about inciting actions for markets. This is definitely an exciting action for for the the team. But you know, it's a long season.

It's all stats. We'll see how it comes together. A couple of home runs, you know, get the ball rolling. So you are in the trenches, Jerome, on a bond desk of global repute, and you get a regime change like this job's report and its revision. How does your desk think when you get a sea change like this? I mean, I'll be honest, Tom, regime change is a pretty strong word. Um, I think it. You know obviously hints that progress and some of that progress we've seen

for quite some time. You know, we shouldn't be surprised by that healing process and growth continuing. Uh and and necessarily I don't think it necessarily changes they calculus all that much. Some of it's some goods back from last month. We clearly see that in a household report. Um. But I think ultimately what it does is puts bear in the center. It's really your goal, you know, similar to

the Inkies trying to get to the World Series. The goal of dead is to is to effectively get to the end of the year and get to that point where they view ustential further progress is being made. And that's sort of been the mantra that we've been operating here at PIMCO, is that that growth will continue, that you'll see an unemployment rate close at about four and a half percent by the by the end of the year, and and those things are the metrics social help that

tapering process and digested rather easily. The concern for us is that digestion, and I think that's the focus for we need to make substantial further progress. With a Mets fan, Yeah, it was about to say, I take issue, are you comparing the Federal Reserve to the Yankees? But I digress, Jerome. You you're talking about the adjustment and how that will occur in markets, and I'm just noting that there was a flood of cash into money market funds over the

past couple of weeks. There's just move toward a risk averse stance, and how quickly could that potentially change? Could that potentially get turned on its head if people start to buy into a four percent wage increase year over year, which is what we just got. Yeah, you know, I think there's a few reasons why you seem general trends, and I think if you take a step back, you've actually seen move out of money market funds for the previous few months and now it's come back slightly. There's

a few reasons to that one. Frankly, investors are worried about capital loss either some volatility and broader markets and equities and certainty with growth outlooks. That's one area. The second area is simply concerned about higher rates. And so the mark to market, if you will, is owning duration, owning interest rate exposure. Specifically, longer duration comes with a lift. Sure you are an income, but you can have loss of that price evaluation, and that is potential loss for

people who have taken a lot more interest rate risk. Uh, And that and that renewed growth expectation or concerns about inflation really eat into that. And then the second, the third thing really is that inflationary discussion, possibility of negative real returns. You've highlighted very many times about the real

real rates. Those are real practical implications for that. There's sort of way to mitigate that is being in those cash elements and more importantly, trying to navigate the difference between being at zero cash interest rates where key builds and demand deposits and things like and try to find some modest marginal appetite to close those inflationary headwinds from from being in cash and not earning returns. So it

really is a whole discussion of risinication in that process. Here, let's do a modest dated check here with the Dow up a hundred and fifty one points, we're out at record has thirty five thousand, two one five on the Dow sp X nine. Lisa, I just did a fancy Bloomberg. This is a te function on the Bloomberg. This is two standard deviations out. How far is up for standard and pores four four six seven would be a two standard deviation trend move we're not there. But nevertheles a

nice two ten percent lived out to a record high SPX. Critically, Lisa, those real yields and bonds that do move but don't move all that much off about nine forty am just as one measure the thirty year bond. One I had to mention the thirty year bond just because it drives er Ome nuts. That's great, Yeah, but it's right, it's out of his purview. He is focused on the here

and the now. Uh. And I thought that you'd be really excited to talk about this time, considering that this is the bulk of your portfolio and triple leverage cash. But when we talk about cash, let's talk about corporations and how much cash they have the fact that they are putting it in the bank at a time when banks are hoping to lend to them and failing. What happens if they start to deploy that cash. What is the mechanics behind that drome? Yeah, I think that's exactly

what you want. It would be less concerned about, you know, how you create that liquidity, etceter. The liquidity is clearly there and those things, but it really translates into growth and it translates into capital expenditure and ways to demandage it or delivering balance sheets which has obviously increased in leverage over the past, your your plus and so those are probably positive and nurtes things for where they for the overall environment to minds, productivity growth, things like that.

So while you might see on on the in the data in the minutia, the data that you know, if there are some models, there are some wage pressure buildings, specifically in lower areas, there's still pretty pretty pretty dominant themes that create some pretty good clip profitability in those regards. I think you have to what the problemtary investors is is trying to reconcile that to really what's the valuations that have been already priced into the market. And that's

where you know, indigestion or or palatability comes in. To try to fige out if that's the right way to take risk, whether it's through credit or equity risk, etcetera. Drum Schneider on nine hundred forty four gazillion dollars of overnight repose the wall of liquidity out there and what I call the trust market. Jerome Schneider, what does it

do in the coming months. Yeah, I wouldn't necessarily take too much in terms of that number because you think, here one you have sea build supply which is lower, so people need to find a home for that cash. Fortunately, we have the stage of reverse reep facility that you mentioned at n billion and and it's rather unlimited. There's some the potential constraints that were not anywhere near that. We would expect that to actually grow to maybe one

point five trillion before we had any immediate concerns. So this is simply finding another avenue of one of the cheapest assets out there at five basis points. Again cheap being relative, so you're in five uhcent on that overnight cash.

The other side to this is the set has been really focused on not only financial conditions but liquidity conditions, and we've seen them announce this in the standing repo facility back in the FLMC minutes the past the past few weeks, and so we actually published a blog posted on this this morning that the standards standing repo facility does a lot to alleviate concerns of liquidity on the

other side, meaning providing funding to the marketplace. And although it's not perfect, there's some issues with transition transaction mechanisms and how we actually think about it. Um The reality is that you have comfort on both sides how to invest cash and how to borrow cash, and so that focus on liquidity is a bright, bright spotlight some of the market mechanisms that have been frankly weak spots over the past few decades. Jerome, we just have about thirty seconds.

Does this apply to the broader fed balance sheet that they have to keep it as big as it is or bigger from liquidity perspectives, from technical perspectives, well, I think that their main focus is making sure markets are stable. I think when they really focus on another thing to have to turn their eye to how that liquidity transit transmission mechanism actually works. And it's it works in old old sense meaning going through going through dealers, primary dealers, etcetera.

But it doesn't necessarily hit all the end of users to borrowords or have cash. And so I think that that second derivative of where that cash actually ends up in equity is just going to be come a focus. But ultimately for investors, this is a period of very low rates, very low cash for a considerable period of time and trying to figure out how to manage around that with the FED context is what the is, what the difficult conversations can be for the next two years.

Thank you so much. Had a short term portfolio management at RIM. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten a m. Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine a m. 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.

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