I love the way you go after consensus what's consensus get most wrong right now.
Well I think the consensus right now is pivoting very feels like very quickly to peak inflation slower inflation. You know maybe
the Fed backing off. I think that's probably a mistake. You think that that's a
mistake Neal because you think that the Fed is going to keep going and that inflation hasn't yet peaked.
Well I don't think core inflation has peaked Lisa. There she is Tom my arch nemesis now my best friend
on the same side as we're on the same side of the fence. Yeah. Look I mean you know at the end of the day I think things
change. At the June FOMC meeting the Fed basically told us that it was willing to
you know push the economy into recession to achieve its goals. And you
know we went from it's gonna be challenging to achieve a soft landing and now it's going to be very challenging to achieve
achieve a soft landing. I mean you know the path is narrowing. I mean they sort of use these
kinds of you know words to basically demonstrate how difficult the task is going to be. But you know look I mean the last
employment report was a knockout. And you know essentially we have inflation significantly above target. You heard Michael
McKee. They're talking about unit labor costs. I mean labor costs are up a lot. You know interestingly enough during the
pandemic prices have actually been trailing unit labor costs which in my view means that there's more upside to prices going
forward. And despite the fact that price inflation is so elevated
financial conditions what they've been doing over the last couple of weeks while they've been easing. So to me that
suggests that the Fed has a lot more room to go. I think the die is cast now for a 75 basis point move at the September FOMC
meeting and they need to leave it on the table for the remaining two meetings this year. What does that mean for equities. I know
that you've been a big bull in terms of the corporate resilience and their ability to adapt and adjust to use Tom's phrase. Why
is this time different this moment different when it comes to that.
Well I mean. I mean equity markets. When you think about it. Fundamentally it's really driven by three factors right Lisa.
Its interest rates actual and expected earnings and the risk premium. Right. So the move in July the 9 percent burst in the
S&P 500 last month. That was entirely driven by lower interest rates. So if I think the Fed's going to keep hiking I think
interest rates will go up. And you know the economy is not out of the woods. I mean we're going to see residential investment
contract in the third quarter. We're going to see capital spending come down because growth expectations have softened.
Inventories will likely be more negative particularly for you know sort of durable goods
industries. So you'll see an inventory liquidation of some kind. I'm assuming that's all negative for GDP growth which is
negative for growth and earnings. And so. And so if if interest rates are going up and earnings estimates are coming down it's
hard to be optimistic about the equity market. And of course the equity market is one way the Fed has to slow the economy down.
Yeah. On the subject of earnings Neal obviously the ability to retain profit margin in an inflationary environment like this
one is predicated on the ability to pass on higher input costs to the consumer and consumers to tolerate those higher prices.
Are we overestimating the resilience of the U.S. consumer. Consumers have an enormous ability to take on higher prices as
evidenced by the fact that you know look at how much excess savings they have. I mean the entire improvement in consumer
spending in the first half of the year was driven by lower savings rates. But that can't last forever. Right. Bingo. So
where does that leave us. Neil. I mean to me it just leaves me more cautious on the economic
outlook. I mean it. And yeah I'd be cautious on stocks. I mean I get that the equity markets have kind of ripped here. You know
maybe a lot of the people that were thinking the way I do about things already sold back in June.
But you know this isn't over yet. And you know that that that's my view.
But I definitely and I think one of that is one of those reasons is because the Fed's not done yet. And you think about the rest
of the world. The dollar is likely to. I mean I don't think the dollar
strength is over yet. I mean you have you know a U.S. economy holding up better than many of its major trading partners. You
have the Fed still hiking. That's obviously very dollar bullish. Is holding up better if we get a dollar inflation. If we get
whatever the real economy will give us does it sound like with productivity it's going to be all that much. That's still a
sustained nominal GDP. So let's go to the doctor. Optimism. Can we say that. Dun dun dun dun Brando agree to agree. I think we
could say that. Folks this is rare rare rare encouraging news. But away from that. When you say to Bramwell you're in months
you're wrong. It's going to be because DOT is optimistic. Can corporations adapt to this unique set of cards right now. Well
they're going to adapt. But Tom that's going to require some some pain for the economy. Right. I mean if you think about the
first half of the year you know to me for business economics the most interesting thing is this reconciliation between the fact
that hours worked have been rising very robustly and output has not. So we've seen this big drop in productivity. So the
question is how do companies re-establish stronger productivity. That's going to require some combination of slower hiring fewer
hours worked raising prices. For 50 years it's been total factor productivity to the rescue. Is it going to come to the rescue
again. Technology isn't overly. I mean it takes time. I mean I don't see an investment boom out there right now. So. So where's
the productivity going to come from. I just want to go under the sun and negative notes of Bruno and don't agree. Look I mean the
only real reason you did this is this is the issue is that a lot of people are looking at the Financial Condition Conditions
Index. Neil you mentioned this and it's actually the least it's the least tight. It's the weakest that it's been. It's the
loosest that it's been going back to April. And it makes no sense. And this is a rare case. And but Neil you alluded to this
and this is where I think we agree is the Fed's going to look at this and say I don't think so and they're going to push back.
When do we get that pushback. Well it could come as soon as Jackson Hole.
It could come at the September FOMC. You've started to see it particularly among a lot of the regional 95 regional Fed
presidents. Right. I mean they've been saying we're not done yet. You know look I mean the other thing of course is that they
they'll often they'll try to be hawkish but they sound dovish in the process for example. You know they'll say something like
well it's the markets too. It's too soon to be pricing in cuts. Well you shouldn't be pricing them in at all. So are you even
giving the market that that sort of language. You know I think what the Fed basically needs to say is that we have a singular
focus on bringing inflation down. And. Right. And we're willing to do what it takes in order to do
that. And there are no cuts coming.