Surveillance: Yields Levels With Boivin

were those guys? Uh? Ben Bernankee, Mike, Michael Woodford, Mark Watson, Michael Watt Watson was my man advisor. Um, that was it was. It was a great momentum. I would not have remembered the title if you have not said it, so thanks for bringing that up. No, it's very very cool. I mean, do you have Bernankey moving one way on economics and Michael Woodford with a math maddox on the other side. Must have been intimidating. Is that kind of brain power gonna show itself at Jackson Hole this year?

Are we gonna dovetail the mathematics of Woodford with the more holistic economics of Bernanke at Jackson Hole Young. Uh. Interesting, to be honest, we're we're we're kind of wondering what will really happen there. UM. Our view is that there's maybe too much hope that this is gonna be a

policy signaling exercise, Uh, especially around the paper. So I think this might be a disappointment and uh, maybe returning more to hardcore kind of like academic input to policy making, like we've that used to be the case maybe with a yet this last year with the framework review so on.

Based on your tenure at the Bank of Canada, based on your experience with central bankers and having them as colleagues, do you think that they're concerned by how much control they have are perceived control by markets over not only benchmark rates, but just risk appetite in general. Um concerned. I'm I'm thinking they're pretty aware of you know, central central making has been in the front stage for since

two thousand eight. Uh, we only came in town, So I think they've gotten used to the attention and the center role that they're playing. I think this is evolving though, UM and uh in our view, like fiscal policies is now taking the baton from from them will be more so going forward. So I think we're kind of a juncture where things are changing a bit. But I think their concern is probably more about, like how they communicate around the current situation. I think the potential for mistake

is pretty high. We've seen it. I think we're losing a bit of a long term anchor on on ten year yields, for instance, and I think this is largely due to on certainly around the Central Bank. You know, out looking, we're losing a long term anchor on a ten year yields. Elaborate, please, what does that mean to you?

I think when you look at the price movement from the last two months, right we went from pricing and nation fears uh with tenuiels that were on the way up to what we see now is a complete disconnect between the macro outlook and you know the woman we've seen in yields um you know. Various explanations for that, technical and so on, but I think one of them is, you know, a big debate around what the Central ban is actually doing. Markets trying to digest that your framework,

and I think that's part of the story there. John. I look at the entire economics right now in the word that we keep talking about here between John and Lisa and me, and we make jokes about it, but it's really serious microeconomic foundations. Which is the ambiguity of what's going to happen given a given thrust in inflation. What's the key ambiguity of which way the financial system cuts given a higher inflation? What's the key mystery? Well,

I think, I think Tom, this is exactly Uh. You know, what I think is very unusual about the current situation is that the range of outcome that we are templating collectively, bit on inflation, bit on what the central nights will be doing, even on growth, what is it a restart? Is it at the beginning of a longer kind of you know, expansion. This is a pretty wide range of of outcome, and I think the markets in those environments tend to interpret the news flow and then go from

one kind of potential outcome to the other. Uh. And and these are more like binary kind of outcome, and that creates like the volatility what we're saying, I think, I think what where there's consensus is that this is a pretty constructive environment for RISCO we're seeing that inequities. Of course, we're pro risk. We're to be prosc at the stage, so that is kind of consensus. But from here on the unusually wide range, and I think we're

gonna we're facing binary outcomes. John Pharaoh has led our discussion here of stock and flow, and I would suggest when we look at the death, the deficit is a static object. It's a bathtub. That's the size of an Olympic pool should be Should we be worried about the stocks the size of the pool that's built up of these things we worry about. Yeah, I think I think there's been uh we we left the stock a bit

out of the picture. But like if you if you just take a step back and look since COVID, uh, the amount of spending that has been like put on the table, including with the infrastructure build this week and the reconciliation, we're gonna see no going forward. We're talking about like amounting a total of GDP and new spending that you know we didn't we didn't have pre COVID.

That's a large amount. That's your stock point. Um, we are comfortable or you know, pretty relaxed about this, given the rate they're saying, but I think we're much more now subject and uh, and we're facing a fragile environment where if there are adjustment in rates, it's going to be a lot more disruptive with the stock much larger now, Jean, before we let you go, Dean Courne on the show earlier said that the inflation is contained is the same

as sub our prime is contained of today. That basically, Uh, this is a faith based assertion that has yet to be proven, and it really goes to your call about the question marks underpinning where treasure yields are today. Do you agree that inflation is controlled is the same kind of view as subprime is contained of two thousand seven

two thousand six. Yeah, I think I think it's even more than subprime because inflation is in my view and our view of purely self fulfilling phenomenal ultimately, so it's what we what we believe or markets believe it to be. UM and I think we're seeing that the elements for inflation to to break out to our level, we think it's going to be contained. Ultimately that's still like kind of our baseline, but that's only given. That's far from a given. An episode in the past where inflation got

out of end. I mean, we're not expected, you know, before they happen. So I think that's a that's a fair I would I would, I would have sympathy for that point. And I think this is under appreciated as a risk. Jean bo Then, thank you so much, greatly, greatly appreciated this morning with black Rock. They're really really informed discussion their folks and some of the dynamics that we see right now. I think cut in a macro

drisk at five is founder and CEO Dean. The complacency, the complacency of us to start a program like we have done start this hour like we just have look through all time highs forty seven of them today on the SMP five hundred, and it just seems to me that we're numb when numb to any incoming information that tells you otherwise about this bullish story you've creates it. What does that's how you do well? You know? I

like the Field of Dreams exercise. I think it's interesting to take a movie and kind of make it into real life. But I also in terms of markets, I like taking real events and looking back on him and it is ten years to the week that the I would call it the joint crisis between the Eurozone sovereign episode of and the US dead ceiling showdown occurred. And for the week of this week ten years ago, realized volatility in the s P was nine. This week realized

volatility and SMP is three point five cent. So it just goes to show you the extent to which markets can go from extremely high levels of alatility to as you're discussing something that really is a snooze fest. And I think the important part about the snooze fest is it really dulls our imagination. It it catches us, it causes us to be caught off guard. And of course the lynchpin of it all, I know you host your

show the really Yield. There's not much that up um, so you know everything is linked to a minus one point one too more negative tenure yield, everything, equity valuations, low levels of volatility, and I just I'm very concerned that we're trusting the central banks in a way that you know, history has proven unkind to that level of trust. I go back to, for example, the early two thousand seven period, and to me, uh, sub prime is contained is the inflation is transitory. Of these epic misreads by

central bankers shouldn't be forgotten. They can cause ultimately cause a lot of market harm. H Dana, I want to know how VIX sets here. We had a VIX of twenty two, twenty one whatever back in mid July, and now down we go under sixteen at today. Tell me what the Greek letters say right now, the co movements of the markets say about the umph to get the VIX down to a true bullmarket fourteen or dare I say thirteen? Well, as as I as I mentioned, you know,

realized volatility around three and a half percent. It's almost as if the SP five is a PEG's currency, right, and options on a peg are really not worth very much. And so the gravitational pull as you call it and in the VIX is really contingent on not just this low level of volatility realized volatility, but it's it's nearly ground to a screeching halt. So you know, I had

the VIX floorida around seventeen. Obviously we've breached that. And what causes you to breach it is when you get such shockingly low levels of movement, it's it's the quiet, and uh, A lot of folks have forecasted that there would be some fireworks in August that that has been with some regularity a month where the summer vacation got disrupted. It doesn't look like, at least for now, that that's going to happen right now. So, UM, you know, I think when I step back, I just try to look

at risk reward, and you're right. The equity markets going up, it's not going up a ton, uh, And so you know what I worry about is this degree of complacency. Uh. That again, it's it's grounded in the mispricing of nominal yields versus the rate of inflation. We're we're really hoping that uh, inflation comes down. It's just very difficult to know. And the damage that could result should did not prove transitory and bond yields react ultimately and kind of push

higher on a nominal level. Dingnitating us. I just want to make you, get you to make the point. You said something that I will not let pass. You said that inflation in transitory is transitory, is the new subprime is contained. That's quite a cool. So let's get the conviction call in this market, not the ips, the butts on the one hand, On the other, what's the coal. I think the call is that the the the valuation argument that's being made in equities is contingent on something

that we just have no idea around. And the data tells us, at least so far, that nominal yields are so far below the rate of inflation that the FED could be in a very very difficult spot if we go back and look at all the risk offs that that we've that we've had, and you know, there have been some doozies along the way. The FED has always been there to massage the market and to to lift

it higher for for a couple of reasons. One is that market risk and economic risk typically occur at the same time, right the they typically run into trouble at the same time, and so the FED, in its remit to revive the economy, ultimately has these policies with with work which work more directly on asset prices. But the bigger point, John, is that the feds air cover is always that the rate of inflation, the rate of inflation is below targets, so it's allowed to do much. We're

in a much different circumstance. Now, the rate of inflation is well well well above target. So if we do run into a risk off, we've got to be asking ourselves the question, what's the FED going to do? Just giving that inflation so far far above target already to day, so so important and a place we got you on a spot on that question, then count it there a macro risk Adfinience is the founder and CEO Tom that line there, Inflation is transitory? Is the new subprime is contained?

That's something to take an out. Tell Well, let's get from New York to why I'm bringing Joe my work the chief economist ACTS or Investment Management. Joe. Let's start the August twenty because no one's really interested in August this morning, it saint was. Let's start in August twenty six. Jackson Hall, what are you looking for from the FED

chairmen at that gathering? I'd be I'd be surprised if we had a sort of formal announcement from from them or from him actually in Jackson Hall, because the last few years, quite a few years actually, the FED is try to tone down the importance of Jackson Hall in terms when it comes to to actual policy announcements. It's a place where you debate, it's a place where you lay the ground for your future announcements, but you you don't use it really to be too precise about what

you want to do. So my guesses starts we'll have a pretty consensual discussion from everybody from the FED making it clear that hey, you know, we may still have some sort of differences on the exact timing of when we taper, but tapering we will and this is this is for the coming months. Probed As a Frenchman, I have trouble putting a nest after th um. So yeah, consensual.

Not a lot of conversations of dissenters, I would say, because they're all moving into in direction if you, if you really speaks, so probably not much suspense JO define data dependency for us in the theme as Jackson Hall is going to be waiting and waiting and waiting to

find this new data dependency of this new FED. Definitely, And I don't think that they can answer any precise question at this at this stage because on tapering, okay, it's a matter of months on when they would fully normalize military policy, i e. When they would actually stop

moving great they've given themselves a lot of leeway. And this is where I think they will will have to learn by by by watching them and and and follow follow their their stride because um before the pandemic struck, honestly, there was no consensus on where uh the natural uh unclun rate was in the US. There was no agreement on where the equilibrium interest rate was in the US. It's become even more unclear in this in this crisis. UM,

So I think they will be extremely progetic. And there's again not much they can say at this stage on what they intend to do in the next two or three years. It's sort of shocking to me. We get equity analysts after equity analysts saying, by this rally, basically it's going to keep going up, It's going to go up more than we had previously expected. We have pretty incredibly good data. We're coming out of the labor market,

coming out of inflation. Where you know, if you want to see inflation, if you start to see recovery signs all over the place. Why are economists not changing their projections after the past two weeks. Why is this transitory? Why does this fit into everybody's narrative on the economic side. If it's not on the equity analysts side, I think,

well it come. Mists usually try to to to focus on on one of the fundamentals are telling us, and probably try to take on board what the impact of the beginning of the normalization of manatory policy will mean. At the moment. Yes, you're right, the fundamentals are telling great story. Earnings are doing well, the economies reopening a fast clip. We were very worried about the delta variant, but it seems that, you know, the capacity of the Committe to deal with it is higher than we than

we thought, higher than we feared. Still, there's an elephant in the room. The elephant in the room is how is the market going to behave once we start losing this massive constant purchases of of a verris cree asset and not so risk free assets from from central banks. It's not for immediate consumption in Europe, which may explain why the equity market is doing even better in your right now, But in the US it's a matter of months.

So I guess most economists are trying to trying to to to work the models and start to think, hey, you know, once I take out from the equation those billions of dollars of purchases, where should the market be? And you know, this is probably what makes us a bit grumpy, but that probably comes with the trade. You know, how do you gauge that? Is that just a guess? How do you know how the market will respond? What

do you look for? Well, you can try actually to come up with with correct models, which which makes sense because we've had actually years and years now of experience of an increase in the size of central banks balance sheet. We've had years of experience with with que so you can actually it's not that complicated. You can actually UH estimate the impact of a change in the balance sheet of the central bank on equity prices. That's not that's

not rocket science. The question though, is that, um, what we what is really complicated to UH to estimate is the psychological impact fact that even if the central bank stopped buying, and then the model is going to tell you, hey, you know that means expersent less on the trajectory for for risky assets. The problem is that now the market knows that if something goes wrong, central banks are going to act probably faster and in a bigger way than before.

So that provides a sort of insurance, sort of flooring to the market. And that's the pits that is really really hard to to to estinate. But the direct impact, yes you can and there are lots of models which which do that. The conditioning jail, we've got to leave it there. Really great fan of thoughts. You're my work there Banks for Investment Management, the chief economists Danny tells it. Thank you so much for joining us today. And the state of retail. What's the why behind you're you're in

Joe Felban's enthusiasm. What's the om that's getting retailed to the end of the year. Thank you so much time for having me. I think them that's getting retail to the end of the year. I think number one, it's the consumer, the dollars that they have and the pent up demand that they have for gathering and hopefully being together in a safe way if if this variant can

be controlled. I think the other thing is the innovation that companies have more new product innovation, and not just in product, but think about also in transaction transformation, whether it's curbside, whether it's digital, the convenience that consumers have is greater than ever and it's exciting. What's the lesson learned from the pandemic on inventory management that's so much

part of the failure of margins. Is there something that carries over that they all learned about inventory reduction and sk use helps to drive profitability? Managing inventory is key. Can you do more with less? And can you personalize the offering so that you don't have an abundance of goods leading to mark downs. The head wind today is

definitely supply chain and getting goods into the US. We hear that from company after company and it doesn't seem like that's going to normalize before the end of the year, so we're gonna have tight inventory levels as we go through the second half of the year. How are companies dealing with that, the supply chain issues that they see persisting for a while some of the different ways they're

dealing with it. They're bringing goods in by air. It's not a cheap way to do things, but it helps to meet demand and you'd rather not lose the sale and bring goods in that you can sell at a full price. Some of them are transitioning from the West Coast ports to the East coast ports. But reduction in inventory and hopefully lower inventory levels than we had in the past, will lead to a much more balanced promotional

environment in the future. As the delta variant continues to spread, our people overestimating or underestimating the return of brick and mortar. I think basically, as the delta variant spreads, we're continuing to see reopenings, recover physical story footprints, encouraging, traffic improving, but conversion is higher than traffic. Consumers are going with destinations in mind and picking up goods. There is certainly a concern that will traffic slow a bit if we

see this delta variant expand. But now companies know how to manufacture and to deliver the whole experience with omni channel, That omni channel customer is more profitable than the single channel customer. In big backs, what's your single best by Dana right now? I mean, look what targets doing. It's pretty special. And frankly, look what's Walmart. Walmart is doing. I think the big box discounters are capturing more consumers.

How long can this consumer boom continue? Though in terms of spending, Given the fact that we are seeing prices rise, and we are expecting some of the wage increases to start to slow. So when we see the wage increases slow and yes, prices are rising. We've heard about it in footwear, We've heard about it in other categories. To child tax credits going to be there through the end of the year. The savings rate is high. I think we're gonna see a sustained demand of enhanced spending as

we go through the Christmas time period. Is where people are spending? Is that changing? I know that we went through the cycle of devices, and then recently we've seen an explosion of people trying to buy clothes at fit them as they try to return to the office. Where are the hot spots right now heading into your end? I think heading into the year end by category, I think a parallel is a hot spot, the innovation that

you have, whether it's denim, whether it is footwear. And frankly, look at luxury because the strength there has been quite solid. I think the other hot spots that we're gonna be seeting out there. I mean take a look at off price. Off price stores basically weren't open for a significant part of last year. They don't have the digital Channel. We should be a benefit to that also. Dana Telsea. One

final question, you are a beast of Manhattan. In New York City, we all drive around and see the empty stores. How do you react when you see empty store on Second Avenue on your Madison Avenue and Fifth Avenue are way over on you know, the west side. How do you respond to that? It's depressant. I want to see life. I want to see stores coming back to Manhattan. We are seeing people come back to live in Manhattan. We've certainly seen an optic and apartment sales and the improvement

in Madison Avenue. I'm hearing of an acceleration of some openings on Madison Avenue in this back half of the year. We need the vibrancy to come back to the neighborhoods. Even in the Flat Iron district. The Harry Potter store opened, but then you have so many closings elsewhere. Tourism will help to bring traffic, the return of work, even in hybrid manner, and kids going to school. Danny Telsey, thank

you so much, greatly greatly appreciated. Of course, with Telsey Advisory Group, heeriod update their enthusiasm from Mr Phelbon This morning on Walmart and on Target. This is the Bloomberg Surveillance Podcast. Thanks for listening. Join us live weekdays from seven to ten am Eastern on Bloomberg Radio and on Bloomberg Television each day from six to nine am for insight from the best in economics, finance, investment, and international relations.

And subscribe to the Surveillance podcast on Apple podcast, SoundCloud, Bloomberg dot com, and of course on the terminal. I'm Tom Keene, and this is Bloomberg