Bloomberg Markets Full Show (06/10/2022)

Bloomberg Markets Full Show (06/10/2022)

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From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It is 30 minutes into the U.S. trading day on this Friday June 10th. Here are the top market stories we're following for you at this hour. Yield curve collapse. Consumer prices come in super hot. The market reprice is a more hawkish Fed front end spy curve flattens what can be done to fight inflation. And bad news for Biden. Inflation hitting that 40 year high piles on the pain for the White House. We're gonna speak to Brian Deese director of the National Economic Council to see what the Biden administration can do right now to cool prices and how to spend. Twenty five billion dollars. Been international in just closed

one of the largest funds in history. We're going to speak to the co-chairman on where to find those opportunities in this volatile market. From New York. I'm Alix Steel Tom Mackenzie in London. Guy Johnson is off today. Welcome to Bloomberg Markets Tom. Thanks for pulling double duty today. No summer Friday for us. This is some serious market action out for that CPI. Yeah.

You talked about pain there. That's all in the headlines and we get into you. Michigan US consumer sentiment survey now slumping. Just a build on that picture for households in the consumer slumping to a record low. Alex So fifty point two for the Michigan survey and sends a consumer sentiment for the month of June. The estimates for fifty eight point one. So it is a record low. And of course building on that pressure amid of course these fresh records when it comes to the top line CPI. Cool of course also beating and you're seeing that of course at the pump. Notably but also grocery store sales. Alex this just

really points the pressure across the consumer on the U.S. and of course the political damage as well potentially for the bread for the Biden administration. So also significant in you mentioned that five to 10 year inflation outlook also increasing three point three percent. So short term but also longer term outlook inflation. That's where things can be that come a little bit more difficult a little bit more sticky and more entrenched. And that becomes an even bigger problem then for the Fed.

Indeed. And of course markets starting to reprice that even 75 basis points a 30 percent chance according to some the markets participants and pricing that we are seeing on inflation accelerating into a fresh 40 year high in May as trade is now priced in. As I said 3 1/2 point Fed hikes over this month July and September. That leads us to our question of the day. Can anything be done about inflation. Let's bring in IRA Jersey chief U.S. rate strategist for Bloomberg Intelligence. I read just your reaction to the CPI print today and the repricing that we are seeing in these markets. Yeah. So I have to give kudos to

my colleagues in Bloomberg Economics who basically were saying hey we may not have seen the peak in inflation yet and and we might not get that until July if not if not later. So you know that the market reaction is not unsurprising given the strength of price increases over the last month. And yet you know that the yield curve will probably continue to flatten. We'll probably see somewhat higher yields. And I think this is what it has been one of our core cases for the last six weeks or so for

here at Bloomberg Intelligence is where underpricing the terminal rate for the Fed for the federal funds rate. So Fed funds at three and a half percent is probably low given the current pricing environment. So props to you IRA. Any other day. He was on radio with Guy myself and he was talking about 3 percent of the 2 year. And I was like dude that's crazy. There's no way that's gonna happen. And now we're basically at 3 percent for the 2 year. So a big victory dance for you because you've

been really right in what you think is going to happen. The front end of the curve is that bear flattening really takes hold today. We're now up by about 15 basis points on the two year. How high can the two year go as the Fed has to reprice. Yeah. So I think the two years going to get up toward three and a half percent before the end of this year and that's on the expectation that the Fed is going to keep going in 50. So. So I think there was a big sea change that I think the market kind of was discounting and kind of didn't accept back in in May when. Sure Powell basically said look 50 basis points is kind of the

new normal for rate hikes. So it's 50 basis points. Unless something changes we're going to keep going at that pace. So June and July you know everyone thought was done. They wanted to leave some flexibility and not commit to a 50 basis point in September. But at this point I think September November 50 basis 50 basis point hikes is is likely to occur. And going back to

your question of the day. The reason that has to occur is that in order to get back up toward any semblance of a neutral policy rate you have to get the Fed funds rate somewhere near where inflation is. And even if you use the core inflation in the P.C. deflator which we don't get for another couple of weeks you still have to wind up getting the the Fed funds rate at least a 4 percent. And you know so you'll need a string still of you know a lot of 50 basis point hikes to get to that 4 percent level because you still need to hike at least 3 more percent to get there. OK so 50 basis points not the 75 basis points that maybe some are looking at for the month of July. And certainly the polls in

September that some had been speculating about seems to be off the cards off the table at this point given that CPI print error. What is the timeframe though in terms of rising at 50 and starting to pull this inflation print down. How how big is that window. When does that start to kick in. Well so I think it's not until sometime in 2023. I mean we will see just natural some natural base effects. And you did see some of that in this report today for example even though it was higher than expected at the headline level both at the core and you and headline CPI when you dig into the details you can see the growth of goods prices for example has starting to come down. So a lot of that is base effects. But so the big driver of

this is services. And with services it tends to be much stickier. So we can wind up having an a situation where goods prices basically stop going up because people aren't buying discretionary goods. Right. You've already seen this in some of the unit sales numbers when you look at not durable goods orders and sales but then you look at services and service prices are going up much faster than they had been over the last couple of over the last couple of quarters. So because of that that can be sticky and we can wind up with 4 percent inflation 5 percent inflation in 2023. And that's why I think the Fed is going to

just have to go more than what the market's currently expecting which does mean a flatter yield curve and does mean probably a higher higher yield curve overall. So I wrote what kind of recession does that mean that we get either in terms of the market's pricing what they should be pricing. Yeah. So you know the market is pricing for the Fed to cut interest rates in late 2003 and to 2024. I think maybe late twenty three at this point might be a little bit too optimistic about that. I do think that we are likely to have a recession and it's a recessionary environment where demand for a lot of. Like we said that the

discretionary goods and discretionary services has to decline. Right. That's the only way that we can get inflation significantly lower at this point. And so you have to have a recession. It doesn't have to be a deep recession like the last two. Probably not. It could be a little bit more benign where you see a modest uptick in unemployment where you see spending growth goes down very significantly. And that's what winds up being kind of a a buying recession instead of a an overall. You know businesses are completely cutting headcount but they think at this point businesses might be loath to do that because they can't find employees right now. So but but but at some point they might not fire employees but instead not give raises. Right. So so so that that can be a rather mild recession in terms of what we've experienced over the last 12 years or so.

IRA what is the resilience of credit within this environment. Yeah well well corporate balance sheets are very strong right now and I think the differences is you know if you haven't refinanced yet you kind of missed your opportunity to either refinance some of your upcoming maturities or not. So I think with credit right now it's really a matter of you know will companies think about expanding their operations. And this is where you can wind up seeing business investment

actually start to slip pretty significantly. And that's that's another area where you can wind up seeing it in GDP terms. You know maybe a little bit of a slowing in that sector in those sectors because you're not going to have debt financed business investment. But I think from it from a corporate credit quality standpoint things aren't that bad at least not yet. All right. I really appreciate it. Again kudos to you for calling this one Erin Jersey of Bloomberg Intelligence. Just to recap as you missed numbers they were just really bad. The June prelim you missed no slumping to a record low of three to five year inflation outlook moving higher one year inflation outlook moving higher as well. The biggest missed that we've seen in

over a decade in terms that you missed numbers. Consumers now feeling the worry of inflation shorter and longer term. That's the takeaway you're seeing that reflected in the markets. You tier yields up by 14 basis points. I come out of it. Let's get the view on the ground here. And Jean Sirota the Port of L.A. executive director will be meeting with President Biden later

today. We're gonna find out what the number one thing on his wish list is. This is Mubarak. Really picking up some seem to the downside. S&P off by almost 3 percent. President Biden is set now to visit the Port of L.A. later today. It is the busiest port in the United States. Bloomberg's Ed Ludlow is live from the port with its executive director Gene Roca. Ed. Yeah good morning Alex. Mr. Sirota thank you for joining us. This poll has been so cool to the inflation story of the last 18 months. Your reaction please to this morning's inflation data. Disappointing. How so. Well everyone's feeling it. You go to the gas pump go to the grocery store. We've seen these ships lined

up here last year ahead of the holiday season. Everybody's been working around the clock to do their part to help lessen the friction and get goods to market. There's a reason that we're here. The president will be here later as they you will meet with the president inflation. I think it's fair to say we'll be top of the agenda. What are you seeing in the data through the

poll in your most recent month about demand. About prices on container ships. What are you doing here at the ports of Los Angeles. I think a general ed we're past the worst of this whether it be the health of the worker or the variance of Covid-19 the stacks of ships out in the Pacific Ocean for the month of May will move nearly nine hundred and seventy thousand container units. It'll be our third best month in history. The cargo keeps going because the consumer keeps buying. Those inventory levels have to be built up across a wide spectrum of retailers and importers. That is your latest data for the month

of May. You've just been outlining that. What do you want the president to do. You know clearly he feels that tackling supply chain bottlenecks in layman's terms but the flow of containers through this port will help bring inflation down. But what is it you want him to actually do action on behalf of the nation. Well this is continuing an ongoing conversation since just after inauguration when he placed the executive order on supply chain in specific commodities all the way through to the cabinet members who we've been working with every day. And the White House specifically the National Economic Council. What we've got to do now is continue to increase fluidity of cargo get it to market so we can bring the

next ships in. Rail is our big focus today. We're going to talk about rail. My understanding is that two cabinet members Secretary Walsh Labor Secretary Walsh Transport Secretary Puget Edge have a dual role that they are involved in some capacity in the talks between the unions and the operators. But they're also talking to you on a daily basis about supply chain. How does that manifest itself plays. Well as is Brian Deese of the NSC as we as we also saw Gina Raimondo Secretary of Commerce Tom Vilsack secretary of agriculture. We're working on a daily basis with the White House the Cabinet members and key policy staff.

Those folks are also keeping a keen eye on these labor negotiations but very respectful. We've got very seasoned negotiators on both sides of the table. We want to give them the room to negotiate this contract in the proper manner. And Gene it's Alex in New York. It's good to see you. You talked about how the consumer was really strong. You delivered strong numbers for May. We just got some really bad. You miss sentiment data inflation expectations rose. It was the

worst record low for you miss. It just means consumers. A sentiment is really rolling over. What's your visibility into how well the consumer is going to do in the next two to three months. Well we're all concerned but the upstream water is coming from Asia getting ready for an early arrival of peak season goods.

Looks strong. The June numbers will be very healthy. That peak season cargo. Think about not only the holiday goods but those in back to school. Fast fashion even fall goods are going to start hitting our docks here in Los Angeles by the end of this month. Those orders look very good. Well we'll also see as cost minded consumers looking for the necessary bargains to put food on the table for dinner. We may be buying hamburger instead of steak beer instead of fine wines. We're going to keep buying.

Our savings accounts are fairly high. And the revolving credit number that came out this week was equally as strong. So let's talk then for a second Jean about your visibility into inventories. Cathy Woods actually spoke to Ed earlier this week and talked about how the full inventory build and guys like Target or Wal-Mart was a sign that we could get disinflationary pressures down the road and that would be the peak in inflation. What are you hearing from your guys about inventory build. A couple things and those two fine companies did come out saying that they had bought a lot of product just in case the cargo that's going to be coming this way is not necessarily the product that is going to be looked at for discounting and pushing out. That's going to be seasonal product that is specific to the second half of the year. Also we have one hundred and twenty five thousand companies that import through the Port of Los Angeles. Those two are not going to specifically

drive the inventory story. Many folks tell me that they're still trying to build those safety stocks. Be prepared for our ongoing needs as well as those coming up in the holidays. Jeanne good morning Tom here from London I have a question around China I want to tie that end to what is happening. We're starting to see an easing of the port conditions and exports out of that economy. But of course Covid 0 remains in place for policy makers in Beijing. What do you term seeing in terms of those exports from China and how are you adjusting to the choppiness that we're seeing as a result of some of those restrictions that we've seen put in place. Bill Thomas you know I lived in Shanghai for a number of years keep up with a lot of folks there on the ground. We're in the 11th week of the lockdowns in Shanghai and did not see the

precipitous drop in cargo that some observers had called for. The ports and central government had prioritized this long haul cargo coming to Los Angeles the Southern California ports. And now we're starting to see just a little bit of an uptick which are the peak season goods I just mentioned. But realistically speaking the port of Shanghai has been running at about 85 to 90

percent of true capacity. And the neighboring port of Ningbo is up 25 percent during this lockdown period. They've really stepped up to pick up the slack of these exports from China. OK. Let me bring you back to the conversations and the discussions around the dock workers there in Los Angeles. Do you expect just to be clear you expect to get a deal by July the 1st. No I don't. History has shown that these negotiations go beyond the traditional expiry. But the rank and file dock workers who've been on the job an average of six days a week since the pandemic began or going all out. There's work for everyone who wants it. Both the union leadership as well as the employers

association have stated to me as we broadcast in our press conferences the last two months that they're going to continue to work as hard as they can at the table while everyone is out moving cargo. We don't want any disruptions to the American supply chain. The context is valuable. That has not been a strike since 1972 in 2002. The PMA temporarily shuttered essentially the ports for a period of days. It's estimated it costs the U.S. economy a billion dollars a day. You can understand the anxiety about potential imports whether it's an official strike or not. Do you see a strike happening festival. And second of all. Are we really at risk here. That container rates just shoots up because things get slowed down again. Yeah.

Personally from my vantage point I do not see a strike on the horizon. Both sides are eagerly working at the table. And again these are seasoned professionals. Both sides understand their impact to the economy representing across these 29 ports Ed roughly 9 percent of our nation's GDP. There's been great attention from the president himself. The Biden Harris

administration the cabinet level to keep folks motivated moving into the right direction. And as I said there's so much cargo on the way. Everybody is working on the ground here. Are you actually making progress here. The poor and in all honesty the big infrastructure technology program you're running upgrading. Are you getting us to a place where this isn't going to happen again. Well you cannot say never on anything in the supply chain. It's like any type of craft. There's always something you want to improve it. But we have seen some really great steps forward. In January we had one hundred and nine ships waiting

outside this port complex to get in. Today it's under 20. The amount of time cargo sits waiting for its next move off the docks into the U.S. economy is just about where it was pre surge. And we're moving more cargo out of the port to the interior of the US than ever before. OK third best month ever for the month of May. James Rocha that

on the volumes being passed through the Port of Los Angeles and of course those discussions and the conversations that continue around dockworkers for L.A. of course executive director alongside Bloomberg's Ed Ludlow. Now President Biden delivering remarks at 145 New York time from the Port of Los Angeles. We will bring you those comments of course live. Still ahead as inflation skyrockets we will take a look at where investors are stashing their cash. Stay with us. This is Bring Back. Markets really dropping like a stone. The question becomes how do you hedge this very stickier inflation that we're seeing. So

the biggest broad based commodities ETF now has more than 10 billion dollars in assets for the first time a sign that investors are plying money into those raw materials as inflation skyrockets. Joining us now Bloomberg ETF IQ co-host Katie Greifeld. Katie walk us through kind of the flows that we've seen. Energy is the best performing sector on the day just down 1 percent. And it makes sense. I mean if you look past over the past year that we've had energy just continues to lead the pack.

So it makes sense that you're seeing flows into this ETF in particular. It's a bit of a mouthful. It's the Invesco Optimum Yield Diversified Commodity Strategy ETF Ticker PDC. Like you said it's a broad based commodity ETF. You have a lot of single commodity ETF out there. This actually holds a basket of 14 different commodity futures. Really interesting and it's seen

inflows of at least 100 million dollars every single month this year which makes sense again when you look at the performance of 46 percent. You compare that to spy for example down almost 18 percent. It makes sense that you're seeing flows follow that performance. Katie how does that compare to the flows you're seeing into any ETF that track the energy producers themselves. Is there a preference to have direct exposure to the commodity itself

versus the producers. Well it's interesting. You hear a lot of commentary that you should actually go after the those producers the companies that are mining. But given that you know being in the stock market itself those equities it's been a tough time. It seems like most of the flows are going into the actual commodities themselves which again you see with funds like PDVSA those sort of diversified broad based commodity ETF that hold all of the assets that are going up right now. It seems like

everything physical is in short supply. Yeah I'm just we're just showing right there a crypto linked ETF are the biggest loser so far this year. So that's not benefiting from this inflation protected move. Nothing at all. I would say there's three thousand ETF in the US. If you look at the six worst performing non leveraged funders all crypto linked equities because there's not a spot bitcoin ETF. Not yet. But it's interesting again because these are the equities the equity market obviously under pressure right now. You have the crypto equities underperforming bitcoin itself. Bitcoin some 37 percent this year. The worst performing crypto ETF crypto equity ETF down 66 percent. Wow. Katie did you say three thousand crypto ETF. No no no. I

said three thousand in equity ETF. I was about to say. Okay. Okay. I would think that it would be quite the number. So any bitcoin you're looking at twenty twenty nine thousand four hundred ether is down 3 percent as well. Katie Grifo thank you very much on those ETF flows. Right. You can catch Katie on Bloomberg ETF IQ this Monday. That's at 1:00 p.m. New York time. Coming up we will talk inflation and supply chains with the CEO of a company that owns middle market retail names. What a time and what a day. To discuss that Elliot Sabo of Cody is up next. This is Bloomberg. We are an hour into an extremely ugly trading session the S&P now up by almost three percentage points. Bloomberg's Abigail

Doolittle is tracking some of those moves for us. Abigail Good description Alex. Ugly indeed. Here's three down days for the Nasdaq 100. And we have over the last three days this week in fact the worst stretch going back to late January. But over the last three days alone down six point six percent. And of course a lot of this on inflation coming into today's CPI print and revised economic views. But that hot hot report really pressuring the Nasdaq 100 in particular because it means that we've seen two year yields the short end of the curve absolutely surge higher. That brings valuation front and center. As for

some of the worst sectors on the day. Let's break it down and we're going to see big big declines. The retailing index is down 4 percent. Wal-Mart Target all these retailers. Coles talking about inventory problems problems managing inflation. Today's report certainly brings that into the forefront. Software down four point one percent hardware down about three point five percent. And then the banks. This is interesting because of course I was just talking about that two year yields spiking

right now. The last time I looked at it 14 basis points right around 3 percent at three down 3 point to four percent. This has to do with why we have the short end spiking the long as basically saying place in place. So we have flattening yield curves. And in the case of the five thirties we had a brief inversion earlier and the two 10 yield curve. Last time I looked below 10 basis points in the banks not liking that at all. Rounding it out we of course you Alex and Tom you just broke that you missed. No not so long ago. Well here it is a record low. Americans clearly not feeling confident about the current environment between growth slowing wages the inflation. That's an ugly chart. And it may suggest that there's more to go for

stocks as the year progresses. Tom. Bloomberg's Abigail Doolittle worth noting as well that spreads blowing out here in Europe particularly the peripherals of ETP and Greek debt a big move out yields up more than 20 basis points on both of those right. U.S. inflation hitting a fresh 40 year high in May. The preliminary University of Michigan index as Abigail was mentioning that sinking to a record low. Joining us now for a read on the consumer then is Elias Sabo Cody's CEO. Cody owns and manages diverse North American middle market businesses. Elias thank you for joining us this morning. Walk us through your views then on inflation and input costs. And when you see inflation finally peaking if at all this year what is your assessment of the data that we've seen so far today. Thank you Tom for having me on this morning. So you know we've

seen inflationary pressures really for the last year that have continued to build you know across the spectrum. I mean it's labor inflation which continues to rise. Clearly supply chain continues to be challenged. The port congestion is very difficult creates a lot of operational inefficiencies in our manufacturing and light assembly plants that we have. So there

is inflationary pressures. Commodities obviously you know food energy really they're present everywhere. I would say as the you know we've come into the second quarter. And what gave me some hope that inflation may be starting to pick out a little bit is we are starting to see some costs that are reversing. So for example we've seen container cost out of Asia pre pandemic. They were up for X at their peak. They've now come back 50 percent. So they're still up to X but you've seen some relief there. Now on the other side of the equation we're seeing diesel prices really rise. We're seeing labor costs continue to go up but labor availability is getting better. So I guess net net it feels like some of the pressures are starting to ease a little

bit. But the headline number today suggests that inflation is still with us for some time. Well I guess that's a good distinction that you know you may have peaked on inflation. I'll be close to peaking. But that doesn't mean that inflation then falls like a stone. And I guess what. What is your visibility of. If we have peaked a little bit here maybe visibility into how quickly prices can come down. And if so where. Yeah Alex I think inflation is like a boat rather than a race

car. I think it takes a lot of time to turn it and I think it's gonna be with us for longer even if we are starting to be at a peak level in. So you know. Just think of where inflation is building up as a consumer products company. And we have industrial companies. We were getting inflation that was kicking in pretty hard in the first quarter and into the beginning part of the second quarter. We still have to push those prices through in order to gain our margins back. And so we view CPI is probably a little bit lagging to some of the inflationary pressures that we're seeing now on top of that labor of which constitutes the majority of inflation. And we don't do a lot in services. But you know labor is an even bigger component in

services. You know we're just seeing labor costs continue to rise. I mean availability of labor is getting better but it was labor continues to go up as it is. And as the port congestion continues to stay as bad as it's been all year and I want to emphasize this it is not getting better in the ports right now. We're not getting more goods that are flowing through. And so with those two conditions present I don't see how inflation is going to come down quickly in the next three to six months. Absent some type of shock maybe a much larger and more aggressive kind of fed hiking process or the economy recesses more quickly than people anticipate. And we're not seeing that. We're seeing demand still say robust especially for you know

middle and higher priced goods. So it feels to me like inflation is with us for a little longer than people anticipate. Okay. So so demand demand is holding up. You talked about the ability to pass on those prices. We saw that sentiments of around the consumer at a record low. Are you concerned that that demand starts to crumble that you start to see demand destruction a bias strike for some of your companies. Yeah. Tom I think you know it's always a good question to people

you know say one thing and do another thing. And you've seen I think with you Mitch in particular that a lot of times that is the case. What we're seeing today is the more price sensitive buyer that goes through the mass channel. Demand has been destroyed. And in some of the products there we're seeing double digit declines. And that's been going on for the last three to four months. And I think it's just a function of you know do you do you allocate your capital or your dollars towards food and energy or discretionary items. And we know what consumers need to do there. For those that are in the higher to the middle to

higher end of the income spectrum there is plentiful jobs right now. Wage growth is strong and likely wage growth is more than what the basket of goods for that consumer what their inflation they're experiencing. We're seeing very strong demand. And you know the vast majority of our portfolio and products is sold through specialty and more niche markets to a middle to higher end consumer. And demand is pretty much as robust as it has been coming out of last year and into the beginning part of this year. So we don't see that yet as a trend. Now clearly we'll have to see what the wealth effect how that affects people. And you know continued negativism around the inflation and other data. But right now it's not translating through. Not the only one to to mention that that the feeling and the actuality tend to be different. So they might feel negative but they may still

buy the things. Ally is we have a question of the day that we do over the two hours to kind of get a sense of where we are. And the big question for us now is what can be done to tame inflation from where you sit you invest money. You have a read on the consumers as well as industrials. What's the number one thing that can be done right now. Yeah. So first off I think if I was a Fed chairman I'd probably resign because I may be the easiest path but I've been at the you know I think if I've got to get a lot more aggressive it just feels like we have to go into recession. And I know there is a goal for us to have a soft landing here and for inflation to recede. But it feels like the conditions are such that if we

don't have a reduction of demand and a material reduction in demand I don't know how some of these inflationary pressures get broken. And so to me it feels like quantitative tightening needs to continue because there's too much liquidity and money sloshing around in the system right now. And it feels like rates need to go significantly higher in order to get the economy to recess break inflation's back and then have a new point that we can start a you know a rate reduction cycle again. Interesting to hear you there advocating for it for a recession at what would higher rates what are higher rates doing to your businesses though in terms of their ability to raise capital and invest. Are you seeing your business portfolio companies that you own or have investments in started to reduce CapEx and make other cost cuts.

Yes. Right now time. The answer is no. We were fortunate last year and that we did a billion three a bond placement at record low interest rates five in a five and a quarter percent respectively on the two bonds that we did. And we have no short term debt. So we provide all the capital that our companies need. We have told our companies to continue to invest right now both in cap ex. Importantly we've had our companies invest in inventory. We've grown about one hundred and fifty million dollars worth of inventory in order to manage through this port congestion. Now this is quick moving inventory that doesn't have

a lot of obsolescence risk but it's allowed us to take a lot of market share because our competitors have not been able to do that. So we look at times like this when markets are in turmoil as great opportunities for our companies to be able to invest at the point of attack to take market share. It's also a great opportunity for our company to be aggressive. We just announced on Monday the acquisition of 3M Aloft great company that is the leader in specialty insulation for outerwear has a great sustainability angle to it. So when the VIX is high and our competitors whether it be at Compass where we compete with

private equity companies for middle market businesses or for any of our companies when they're competing with their peers we find that these are great opportunities for us to be able to use our strong balance sheet and take advantage of weakness in the market conditions that we're seeing right now. Fair point. So then before we go Elias what looks good right now. Well you know we always like consumer businesses as long as their position properly. I would say were cautious Alex in general and there has to have some type of differentiated story we fully are in the camp that there will be a recession that's coming because it's you know as my view was earlier it's going to be needed to break the back of inflation. So it creates you know an earnings trajectory. When we look at companies like industrials we would think naturally their earnings should start

to come down. We would say the same for consumer businesses. But if we have positioning for those companies where there's disruptive technology and there's macro tailwinds those are the type of businesses that we would invest in. Yeah. But I would say in general right now we're kind of fearful pretty much of everything unless it's something disruptive like private life. OK fair enough. ISE. It was really good to catch up with you. It was a really important day to talk to your life. Szabo Cody's CEO and nice to see you. Thank you very much. Coming up behind inflation 40 year high. What is the White House's plan to ease

pressures on the economy to day to day. We'll talk to Brian Deese director of the National Economic Council. He'll be joining us next. The S&P up by about two and a half percent. And that's up one hundred off by three. This is Bloomberg. This is Bloomberg Markets arm which can get day you're looking at a live shot of the principal rim. Coming up an exclusive

interview with Advent International's David MSA and James Blocker Bank. That's in the next hour. This has been back. The latest inflation numbers showing price pressures are getting more entrenched in the U.S. economy. CPI hitting a 40 year high in May jumping eight point six percent from a year ago whereas it's showing up most while essential stuff like shelter food and gas. Which brings us to the question of the Day. Can anything be done about inflation. Let's get the political view now with

Brian Deese director of the National Economic Council. Brian I wouldn't want to put a time frame on it. What can be done to lower prices in the next three months. We'll look at the numbers today underscore what the president has been saying and what we are focused on which is fighting inflation has got to be our top economic priority. And there are a number of things that we can do. First is the Fed has the tools that it needs and we are giving them the space that it needs to operate. Second Congress is considering a bill right now that would crack down on ocean shipping companies and reduce

some of the exorbitant rates that companies have had to pay to ship their goods into the United States. If we pass that bill it would have some real impact. We heard that from CEOs this week. Number three we could pass legislation to lower the cost of things like prescription drugs things like utility bills for American families while lowering the deficit. We do that. It would be complementary to the Fed's actions while also giving people some relief. Fine. With all due respect people are going gonna want to hear about drug prices and the budget. They want to know when they're right at the pump is going to go down from

five bucks to three. What can you guys do now to change that. Well I very much appreciate that and we very much get that people out there are frustrated when they're looking at the price at the pump. But at the same time we need to look at what a typical family's budget is made up of over the course of a month. And there are lots of families out there. If we could reduce prescription drug prices that that would make their life a lot easier. But if it comes to energy prices we know what is driving this. We are yet we are dealing with a vicious war in Europe that has driven up the price of oil and driven up the

price of gas at the pump. The president is using every executive authority that he has right now and we need everybody to step up. One of the big reasons why the price of gas is so high in the United States is that refinery margins the profits that refineries are charging have hit historic levels. You need industry and the government to work together here to try to get

more supply into the market. But Brian the real problem is that they're just not enough refineries. So you have the refineries that are working like crazy right now. They're almost you know 90 plus percent capacity working on the products. We just don't have enough refiners to do it. And that's a problem. Whether or not the war with Russia was happening or not. Now have you talked to the CEOs of Valero of Chevron Exxon guys that can actually make a difference on the ground. We've been having conversations for months with those people including this week with at the CEO level and have made very clear to them what I would be clear now which is this administration is prepared to take any actions with respect to federal policy that would help in the immediate term. Expand that capacity. But you're absolutely right. The private sector reduced refinery capacity by 800000 barrels a day in 2020. Before this president took office. Those were private sector

decisions but they leave the refinery capacity in the United States down. We have made very clear at the CEO level to those companies that we're prepared to take actions on the federal level. But we need them to take action in terms of increasing investment to keep capacity as high as possible and to bring more capacity online. Brian other incentives you're in the White House can put to play to increase and encourage that investment. Well first and foremost the market is providing an enormous incentive. As I said refinery profit margins have never been as high as they have as they are right now. Literally never been that high. So the market we operate in a market based system and the market is

providing an enormous incentive. On top of that we have made clear that to the degree that there are emergency authorities that would be helpful in the very immediate term we're prepared to take them. We've communicated that clearly to the companies and we we stand ready to act. I'll give you an example. Earlier this week the president invoked the Defects for Defense Production Act for electoral ISE which is a key component that goes into hydrogen and the production of hydrogen. We've done that for the inputs that go into large capacity batteries critical minerals and metals. We stand ready to act but these are private companies that operate and we are we expect them to bring capital on line and the market is providing an extraordinary incentive to do that right now. Brian can you give us an update on the discussions around

potentially lifting tariffs on Chinese exports into imports into the United States. We know that many within your team advocated against those times in the first place attacks on imports as in the US. Where are we in that discussion. It's time to scrap those times isn't it. Well it's a lot of conversation and it's with the way with the president now he's having conversations with with the team and so I'm not going to read out those private conversations and get ahead of him. But I will say that the president is going to be at the Port of Los Angeles today talking about what we can do as a country to try to get goods into our country as quickly and as cheaply as possible. Tariffs are part of that conversation. But

our supply chain more generally both the resilience and the efficiency of our supply chain are a big important issue. And the president will be talking about that today. Last question Brian. In the beginning you talked about the number one thing that can be done is the Fed can hike the markets repricing that very quickly the front end of the curve repricing that very quickly. And it looks like it's going to lead to a recession. What kind of recession can you guys handle at the White House if

you're putting the onus on the Fed to do that job for you. Well I make a couple of points. The first is we are in a period of transition right now and we need to and we absolutely can transition to more stable growth. You'd look at things like our labor market and even consumer spending even as we face challenges with inflation continuing steady steadily to move forward. There's every reason why that can continue. And with respect to the Fed this president has done something that prior presence have not. He's made clear that the Federal Reserve not only has the independence that it needs to operate but he will respect that. So I'm not going to comment on the specific tactics that the Fed would take other than to say the president has made very clear inflation is the top priority and the Federal Reserve has the independence it needs to act.

OK Brian D. White House National Economic Council director. Thank you for your time. A busy day of course for you and the team and a fresh record when it comes that CPI print and of course consumer sentiment survey falling to a record low. Let's get more now insight into how the market is reacting to the red hot inflation data the dismal consumer sentiment numbers. Steve Sosnik interactive brokers chief strategist with us now. Steve are you starting to position for a recession. Starting to think that positioning for recession. I think quite frankly you know what we're seeing today is terrible. But let me be clear here. A recession is two prints in a row of negative GDP.

We've already had one. And the Atlanta survey is basically around 1 percent which could easily teeter teeter more after we see these consumer sentiment numbers and the CPI number. So I think if you haven't been considering recession it's probably ample. You know it's probably past time to do so but you should be doing so now. The bond market certainly has turned around and the stock market is following suit. This is this is a really unattractive couple of days. Hey Steve what more can you sell right now. What else can you sell. Well Alex you know the.

There's always a bid for something. The question becomes if you think we're going to break through the lows that we saw a couple of months ago. Well then there's plenty more you can sell. That's. You know that's got high valuations. There's still a lot in the tech sector that that's highly valued. You could take profits in energy if that's if that's you know that they do a bit of a contrarian trade. But if you've got the profits which is which are wonderful if you've been long the sector maybe it's time to consider taking profits there because oil doesn't seem to really be breaking through 120 with any great vigor.

But right now you know this is about return of capital not return on capital. And so I think you really have to be very clear about assessing your risk tolerance. If a day like today or couple of days like we've had freak you out then you've carrying too much risk. If it doesn't well then you're probably positioned reasonably well. What is your assessment then other consumer Steve because it has been that pillar of strength that many strategists and analysts appointed to in terms of shoring up the demand and then the stocks of course that stock performance muted here today of course. But where are you in your thinking about the consumer and whether or not we're seeing a fundamental breakdown now.

You know Tom I. That opinion of mine has changed since the since the sentiment numbers. I think the consumer was already quite weary. There's a very heavy correlation or inverse correlation between gas prices and consumer petrol prices and consumer sentiment at the pump. But basically right now you know this is telling us if we're seeing record lows and consumer sentiment now granted it's one number but the consumer is such a huge sector sic consumer sector is such a huge part of the economy. If the consumer puts their wallets in their back pockets then then this is going to be very tricky. And this starts to talk about stagflation because the inflation is not peaking as the CPI number tells us and stagnation is probably somewhat evident.

I wish I could be less gloomy. I really didn't want it. Just sounds so terrible. Steve it's OK. You're just taking the data here and you're looking at the curve and it's saying exactly what you're saying. You're looking at that spike in the front end the long and you see that bear flatten or do you play a bull a bear flatten your hair in shorting the curve. Like what are you doing in the bond market. In the bond market basically I basically stay you know more or less somewhat on the short side but I think the easy money's been made. On the short side though I do think it has room to fall. I'm much more you know as you know much more of a volatility guy. And I think right now VIX is VIX. Among other

things it's underpricing the volatility that we could be seeing. So I think I tend to be a bit more focused in that regard as a hedge. Well you know whereas in fixed income I think you know certainly certainly there's I think more downside to come in terms of prices upside in yield but that's going to be a little bit tougher sledding. I think for four because without the

change in prices occurred so quickly. Steve just briefly what would you need to see to change your view. Well I'd need to see some improving numbers or see the Fed really get the sense that the Fed is really kicking into gear. Think about it this way. They've been teasing Kuti for months. It hasn't started yet. The the balance sheet has just sort of plateaued for the last couple months. We don't even get it until Monday until Wednesday. So I'd like to see some some either

numbers or some real more action from the Fed which will hurt. Okay. Steve Sosnik of Interactive Brokers. We appreciate your insights. Thank you. On this important day. Coming up on the European clothes Andrew Goth Y. Credit Suisse head of global equity strategy. Get his views of course amid this selloff pronounced selloff we're seeing in Europe and the US. This is Bloomberg.

2022-06-13 08:20

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