Welcome now Sunny Special a CEO of Rock Creek and Greg Peters co CEO of PJM.
So Greg let's start with you. What are the markets trying to tell us.
Markets are trying to tell you David that the Fed has a lot of work to do.
Inflation continues to be quite this persistent.
What I think the inflation numbers showed us is that how broad based it was
the focus was on the core number and the core number came in double what was
expected and the markets were leaning the other way.
So I think this is just a reaffirmation that inflation is entrenched in the
system. The Fed has a lot of work ahead of
itself as do other central banks. And the markets need to adjust.
Yields need to adjust. And the economy as a consequence of this
higher rate environment needs to slow down.
So Sunny it looked like the market started to adjust certainly this week at
the same time how much work does the Fed have in front of it.
Because we keep hearing about there's a lag in monetary policy at same time.
It looks like they're behind. You're absolutely right.
And what is happening is now I think the market has accepted that we're going to
be closer to four four and a half maybe more in terms of terminal rates.
And that was what shook the markets this week.
And as Greg said this is not just in the US.
I think the ECB is behind the curve. The Bank of England is behind the curve.
So this is more of you than more than just a US phenomena.
But no question that the medicine will be tough over the next six months.
And our expectation here is that we would probably end up at probably 4.5 by
the end of the year. Well the most is tough upside.
But is there any danger the doctor might prescribed too much of the medicine
overreact because it takes a while for to kick in.
You're so right. Also because policies take a while to
work through the system. So we know in economics 1 to 1 that that
policies especially interest rate increases can choke off the housing
market for example. They started with 6 percent mortgage
rates. You're going to see the housing market
hugely impacted but that takes not the next month but a couple of months to
work through. So no question that we could
overcorrect. But I think the Fed now feeling that
they have fallen behind has that danger of over correcting.
I think the good news there is that they can always bringing interest rates down
a little bit in the early part of next year.
But most likely they will be very careful before they do that because we
have seen with Deb Volcker and others if you bring down interest rates down too
soon you will also have problems greater since we have pretty broad consensus
that the Fed was late to get started both on rolling off the balance sheet as
well as increasing interest rates at this point.
How do they maintain or regain their credibility.
Because we're a long time. We basically believed in the Fed and
that would take care of what the problem was.
Yeah I think that's the central part of the story in that they have to get
inflation down. I think they realized that they were
slow to react that inflation wasn't transitory.
It's become much more entrenched. It's global in nature as we just talked
about. So the way that their success is
measured is one way and one way only and that is bringing inflation down.
And the unfortunate collateral damage in bringing inflation down is the economy.
So while housing is slower to react I think what the Fed and other central
banks are really focused on is bringing inflation down because credibility is
based on that fact alone. If we think about the prosperity that
we've had at least from a market standpoint since inflation has been
under control since central banks have built their credibility they need to get
that back. And that's what they're desperately
fighting for. Is you know terribly well.
The Fed has two mandates its full employment as well as stable prices.
Right now it looks like they're focused on the second that we're out of
employment. How does this work for wage earners as a
practical matter. Because on the one hand you want wages
to go up. And by the way real wages for any of the
going down not up because of the inflation at the same time.
If you really have inflation rampant then what they're making is not worth
very much. So the emphasis was on increasing
employment. And that was the first part of
a correction. And I think that was what actually led
to the Fed being so late in in moving towards more equitable and more
equitable economy. And that is what led to this inflation
which is unacceptable obviously to everyone including wage owners who are
now in real terms getting less. But there is what we're seeing now for
example with the ports set on them this week with a number of unions getting
formed existing unions successfully renegotiating wages that we might end up
in an economy. And I don't want to be over positive
about this but I think there is a really good scenario where where the dance
stops sometime next year. Wages in real terms might end up in a
better place. And by that I mean higher.
That is obviously going to be at the cost of of earnings
going down which means that there will be a reallocation between different
stakeholders. And a lot of stakeholders have been
talking about labor and getting a bigger share of the economy.
And that can either be leading to an inflation spiral or something has to
give. And if you could get into an economy
where wage earners are buying more that leads to more consumer goods.
It leads to a better growth rate. When we come out of this.
So I wouldn't be so negative when I read the news about student loans being
forgiven or wages going up at this point.
So Greg for a long time it looked like we were solving the equation for the
value of assets. We were getting asset values that we
were pretty successful in doing overall. If in fact we're going to take the move
that Sunny suggests right now I'd say let's focus on wages of more than
assets. What does that mean for asset homes.
Do we have to average or worse. We're shifting away from asset those
toward wages. Yes.
So I think our time is spot on with this notion.
The Fed basically telegraphed this when they talked about a part of their
mandate is inequality and inequality is wages.
I think what we've seen with this this widening of the wealth gap in inequality
just growing wider each and every year is that this trickle down aspect where
the Fed does zero as the prices go higher and you know the rest kind of
benefit from that. You really haven't seen that.
So the fact that actually wages are going up is a real positive.
I do think that has an impact though. Margins will come down at all time
highs. So there is room for that.
But I think we're moving into this new regime from you know less shareholder
value into wages and worker value. And I think that is a story that's going
to continue to be told here for some time to come.
Well some time to come. So I'm just curious if you agree with
what you said. Are we talking about over a year or five
years. How long do you think this transition
might be. I think it's really in front of us as we
speak. So I think this readjustments we talked
a lot about the negative part of Covid. I think this is the positive could could
be the positive outcome. And what I think is you want more
balance right. You want more balance between
stakeholders for an economy to prosper. If you have too much of the share of the
economy going to one group or another group it's never balanced and it's never
good for growth. So I think this could be sooner than
later which makes me a little bit more positive that you know what President
Biden said may not be completely untrue. We might we might get into a better
place sooner than people expect.