00:00Look, we've been optimistic on the U.S. all year.
00:02I mean, the economy's doing really well, and it's staged to keep doing well.
00:05We think it's benefiting from stimulative monetary policy, stimulative fiscal policy,
00:09stimulative wealth effects from all the equity rally,
00:12and stimulative effects on investment demand from AI.
00:15We think that that's poised to continue.
00:17We think the Fed's rate hike last week was really good news.
00:20It shows that the Fed is embracing this optimistic narrative.
00:23Warsh used the word optimism in his press conference.
00:26And we're seeing that the Fed is prepared,
00:28it's willing and able to use its tools to keep the expansion healthy and balanced.
00:32And I do get your notes that you send out to clients.
00:35So I saw last week after the Fed's decision that you were sticking with
00:38and expected another hike in December and January.
00:41But this week we get more than a half dozen of Fed speakers.
00:44We did hear from Austin Goolsbee earlier this morning.
00:46It's saying the road to 2% inflation may not be painless.
00:49So you were talking about how you might potentially add a hike for that October meeting,
00:54depending on what you hear throughout this week.
00:56What did you view with Goolsbee's comments this morning?
00:58And what else are you watching for from these Fed speakers this week?
01:01Look, we agree that the road might not be painless.
01:03And we think ultimately the risks to our Fed path,
01:06we have the hike we just had, we have two more,
01:08we have one in December, one in January.
01:09We think the risks are to a more concerted,
01:12a longer and a stronger tightening cycle,
01:14just because the growth impulse in the economy is so strong,
01:17because inflation has gotten a little bit sticky,
01:19and because it's important to build credibility.
01:21So we see those features of the economy as meaning that
01:25it's going to be a bit harder to fight inflation.
01:28Maybe the Fed had thought the past few years and that it might think now.
01:30So there's a risk they have to do a bit more.
01:32So on the underlying inflation, I mean, we've got, you know,
01:35WTAC crude oil, Adderneur, 100 bucks a barrel.
01:38That's not good for inflation.
01:40John Tucker's paying $4.50 a gallon at the Wawa, Route 36 in Jersey.
01:45Talks about underlying inflation.
01:46What are you seeing out there?
01:47How do you feel about it?
01:48Look, and it's worse if you're a truck driver.
01:49You can pay $6.50, $7.50 for diesel.
01:52And that's, you know, we're starting to talk about being over $200 a gallon.
01:55So one of the risks to the economy that we see
01:57is that we can get continued rises in energy prices.
02:00Our view has been that the economy is going to be resilient to that,
02:03so long as we don't get back to a price in inflation-adjusted level
02:07like we got in 2008, which would be something like well over $200.
02:10And look, we could get there.
02:12If things get worse, we're not there now.
02:13So we think we're in good shape now.
02:15But that's a risk to monitor.
02:16We think ultimately inflation in the U.S. is driven by momentum.
02:19And so we've had now over five years of high inflation,
02:23including the big surge in inflation during the pandemic reopening.
02:26We think it's just accumulated inertia.
02:30In order to fight that inertia, the Fed might just have to push harder into it.
02:34The Fed's been hoping that inflation would just sort of peter out by itself
02:37without the need for having to push back on the labor market.
02:41And that might not work.
02:42The Fed's coming to terms with that.
02:43What do you think is the biggest risk to your call?
02:46Look, we think that if you're an economist and you're worried about the risk,
02:50you're mostly worried about some kind of imbalance.
02:51And for us, for most of you, the risk was that the Fed wouldn't act.
02:54And the Fed would let the economy overheat.
02:57We get the late unemployment rate to fall too much.
02:59And then the Fed would have to sort of like you'd jump like you'd be hit by a cattle prod
03:03and respond excessively.
03:06And when you start seeing these big amplifying moves, that's when you worry about something having a recession.
03:11The fact that we're seeing the Fed respond more timely now and showing that they're on the path to stabilize,
03:16and the economy reduces that risk.
03:17We're worried about the war.
03:19We also think that AI is primarily driven by optimism right now.
03:22That's fine.
03:23That's a normal part of this phase of the technology cycle.
03:26But if something happens that causes people to somehow lose some of that optimism about the commercialization of AI,
03:32that could be a problem too.
03:33But right now, we think these risks are manageable.
03:35And the consumer seems really strong, resilient.
03:41How do you view the consumer here?
03:43We know there's this K-shaped economy, but it just seems like the upper end of the K is kind
03:48of driving the bus here at the moment.
03:50There's a lot of debate about how K-shaped the economy really is
03:53or whether it's any more K-shaped than it always has been.
03:56There is wealth and income inequality in this country, but that's not new.
03:59We think the wealth gains that are coming from the stock market do accrue to more affluent people,
04:04but that it seems to be working through to the rest of the economy.
04:07So, so long as people have a job, they're comfortable that their job's going to be stable,
04:11and the market remains resilient, we think the consumer will remain resilient as well.
04:16When you're viewing the direction for especially how much the AI prospects are contributing to GDP,
04:24if a lot of those companies are obviously tapping the debt mark as to spin more,
04:28if they're pulling back on that potentially depending on where the rate cycle is for hiking,
04:32how does that then potentially slow economic growth?
04:36So, first of all, I talked to quite a few clients in the data center and the hyperscaler space,
04:41like we're a big institution, and I'm not hearing that.
04:43So what I'm hearing is that people are very optimistic on the demand for compute,
04:47on the commercial demand for AI applications, and yes, rates are going up.
04:51They see that.
04:51They've been trying to get ahead of that the past few months with supply, with issuance,
04:55but that that's not going to derail their plans.
04:57So ultimately, we think that the AI cycle is robust to this.
05:00That may be a reason the Fed has to do more,
05:03because if the Fed's objective actually is to sort of take a little bit of the punch bowl away,
05:07sort of the old William McKesney Martin quote,
05:09that they may have to take a little bit more of the punch bowl away to get people to chill
05:14out a little bit.
05:15So that's more the risk is that there's not enough response and the Fed has to do more.
05:19The 10-year Treasury yield, 4.95%, 5%.
05:23Is that kind of the new normal, and is that okay?
05:26So our view for a while has been that we are going into a period of prolonged high growth,
05:32and that means that the neutral rate, the rate that the Fed has to maintain on average over time,
05:36is going to be higher, and that means that we're going to be in a higher rate environment.
05:39Another way of putting it is if you want 90s-type growth, you might have to have 90s-type rates,
05:43and some of that is getting priced in.
05:46I think some of my buy-side clients are starting to think about where should the 10-year,
05:49where should the 30-year be in a world where productivity growth is going to be really high.
05:53So look, there's some room for a rally here, here and there.
05:56We think the Fed is showing some credibility.
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