Bloomberg Markets Full Show (06/13/2022)
From the financial centers of the world. This is Bloomberg Markets with Alix Steel and Guy Johnson. It's 30 minutes into the trading day Monday June 3rd the 13th here the top market stories we're following for you at this hour risk assets they're selling off. They're selling off big from stocks to commodities. Investors are pulling out of the markets in a huge way. Yields driving the narrative and strengthening the dollar. What peak inflation concerns dominating market fears once again after Friday's CPI report showed March wasn't the peak. What can the White House do about rising cost. We're gonna talk to former chair of the Council of Economic Advisers Austan Goolsbee. A fascinating conversation ahead on Bitcoin. At twenty
three thousand not much of an inflation hedge. Bitcoin trading back at levels last seen at the end of 2020 dragging down the entire cryptocurrency complex with it. From New York I'm creating Gupta in for Alix Steel with Guy Johnson in London. Welcome to Bloomberg Markets Guy already only about 30 minutes into the trading day and it's been a pretty ugly open. It's not the kind of Monday you were hoping for but I guess after the Friday we just saw without the Fed to kind of step in and calm nerves. Maybe this is to be anticipated. We are obviously seeing the Fed still in purdah. We wait. The right
decision a little bit later on this week. The question we're trying to figure out and we've been debating and I think this is the conversation that everybody's having right now and it's been happening since that inflation print Friday. It's 75 basis points back on the table and it's 75 basis points is back on the table. What does that take us. How should we price that. How should we be thinking about this. The terminal rate is rising now up to
around circa 4 percent. We await Jay Powell. And are we in a period of instability until we do. Let's ask Michael McKee. Bloomberg's international economics and policy correspondent. And Gina Martin Adams chief equity strategist at Bloomberg Intelligence. Mike I'm going to start with you. We have a quiet period. We don't know what the Fed is going to say at the end of it. How big a game changer was Friday. And do you think we're going to need to hear from the Fed before these markets
stabilize. Well I think Friday was a big game changer for the markets but not necessarily for the Fed. And the thing that comes to mind about the whole thing is who needs the Fed. The markets are already reacting. And that's what's happened throughout this cycle is the markets have front run the Fed. Based on what they think it's going to happen. Now that doesn't like to surprise markets and has said they would do 50. So it's probably a pretty good chance they'll stick with that and do 50.
But then we could get Jay Powell saying yes seventy five is on the table if we need to. And that'll just spur some more selling and yields will continue to rise and we'll see the front running and the market will be doing the Fed's work for it without the Fed having to go that high. The real question for Wednesday is what's the terminal rate. How high are they going to live that dot in the final dot in the dot plot. Where do they think they need to get to. Because then people will work backwards from that trying to do the math on when they start to raise rates by how much. Gina hop on in here because something that has been
really a trademark or a hallmark of what we've seen so far is the market's front running the Fed the Fed kind of playing a little bit of a catch up. If markets are indeed perhaps putting 75 basis points back on the table what does that mean for the stock market. Well it's meant extraordinary weakness Friday and again today as we've priced in that potential outcome we also priced in a much faster pace of future hikes as well as we're starting to price not only 75 basis points for the coming meeting this week but also much more even preceding September. So I think the market is reacting to inflation at the same time. I mean consider that there's a sort of dual reaction happening in the equity market. The
absolute prospects for Fed implant impacting valuation multiples but then the real data in the form of the inflation prints impacting margin estimates which are impacting earnings growth forecasts. So the equity market is experiencing this sort of dual pressure reflecting what we experienced on Friday in terms of the CPI and anticipating further inflation pressures to emerge with the PPA and import price prints coming this week. Gina could just talk a little bit more about that. The moment it strikes me as is saying a number of things at the moment. One of the things it's saying is that the Fed is still massively behind
the curve and as a result of which is going to have to do more if the Fed is able to deliver the perception that it is getting at least at the curb beyond the curve. Would the market react positively or negatively if the Fed came out and did more. Would the would the would the equity market would risk assets react positively to that or negatively to that compared with say if they came out and did less or 50. So this is the 75 50 debate. Yeah. God it's a complicated question because I think there is more than just the Fed impacting the market right now. I do think that there is the psychology getting embedded in the equity market that anticipates that suggests the Fed is behind the curve. And the longer the Fed remains behind the curve the
more deeply invested embedded inflation expectations become and the more secular transition sort of 2 and higher inflation environment becomes a reality. So there is that danger that the Fed gets behind the curve and they need to catch up. At the same time they need to catch up in an environment where economic data is still coming in persistently strong. Because on the other side of the equation is if the Fed is catching up and catching up so fast that the result is a material deceleration in the economic climate which results in a pull forward of the recession prospects from 2013 2023 to current or a much deeper recession than anticipated then the market will have to balance that risk with it. So it's not just about the Fed which makes this climate particularly difficult. It interesting that Jesus says it's not just about the Fed because if you look at across the market you look at to your yield you look at 10 year yield yields is higher and higher strengthening a dollar. Credit spreads even higher as well.
Combine all of it and you're looking at the financial conditions index that's going back and meeting from key levels that you saw back in 2020 back in 2013 2013 you name it. A lot of significant levels being hit when it comes that financial conditions index levels that in the past you've seen a lot of Fed officials kind of turn around a little bit. Most recently 2013 this Christmas Eve 2018 that hike that we saw and then followed by 2019 where you saw a little bit of kind of a U-turn for lack of a better term Michael McKee. If we see continue to see these kind of markets this kind of pressure in the market what are the odds
that the Fed does something similar. Oh they won't do anything similar. This those examples aren't going to really matter this time because the situation is so different with what's going on in the division between the demand side and the supply side in terms of problems for the Fed to have. We were just talking a few minutes ago about China and how a lot of supply chain problems may get worse again as Beijing starts to lock out. There's so much they can't control here that the the fact that the markets get a little antsy and the fact that financial conditions tighten isn't going to change their view. Remember what happened in 2018. The markets stopped functioning. Right now the markets are functioning fine. They're just going down.
And the Fed's not going to step in to do anything about that. They'll keep an eye on whether or not markets are be able to function correctly and things clear. But if not they're going to keep going for now because all the indications are that they are a little bit behind the curve but the economy is really strong. OK. Well let's just play that out. Is the debate now. Can we get inflation back to Target or is the debate now we need to get the inflation kind of down to somewhere near Target.
Let's call it circa 3 percent. And if we do that maybe we avoid a recession. What is the softest landing looks like right now Mike. Well I think you may have described it somewhere around 3 percent. They'd love to get a little bit lower but what they don't want to do is push unemployment up significantly. Now how high is significant. There's the old Sam rule that if you go up by half a percentage point in terms of unemployment then you keep going into recession. But we're at three point six percent. And that rule has not been applied. When you're that low. So let's see if the Fed can keep unemployment in the low fours. That may be good enough to consider it a soft ish or soft landing. If they could
bring on the inflation rate down to about 3 percent but we're getting way ahead of ourselves and thinking about that. This is going to take time. It took a long time for the impact of the Covid pandemic to be felt and it is still being felt. So it's going to take a while to get out of this. Gina hop back in here let's pose the same question to you. What does a soft landing look like. And is this the best the market reaction that we're going to get given the circumstances. Yeah I think this is a really good question. And the critical question our fair value model actually says we've priced a soft landing. Well we haven't priced as a recession. Even a garden variety
recession would take the S&P 500 down beneath thirty six hundred. So we've priced for a soft landing. We've actually priced for the two year Treasury yield to emerge at about two and a half percent over the next 12 months. So if you have rates moving faster higher faster than to the two and a half percent level or you have economic growth conditions anticipating a much deeper contraction and growth as opposed to just a slowdown in growth to near zero you've got a much weaker market climate ahead. And I think that that's what investors are trying to figure out as handicapped the prospects for that right now. Most
economists are saying hey we're not going to get a recession until 2023 at the earliest. The equity market has to move to anticipate that if it is going to occur. Thirty six hundred on the table. We're looking at a stock market right now just at just shy of thirty eight hundred. Thank you. Bloomberg's Michael McKee and Gina Martin Adams of Bloomberg Intelligence. As always for your insight. Coming up we're going to stick with the market sell off J. Barry J.P. Morgan head of U.S. Government Bonds
strategy. He joins us next. This is Bloomberg. I think about Friday's CPI print as the Fed's bigger boat moment. So you may recall in Jaws there's this moment in time where Chief Brody is charming and he actually sees the great white shark for the first time and realizes it's much bigger than he had anticipated. And he uttered to his shipmates we're gonna need a bigger boat. Friday CPI print was that bigger boat moment. And that's why markets are reacting the way they are. Because they believe the Fed is going to be forced to get more aggressive than they had expected. Great way of looking at it. Christina Hooper Cisco's chief
global market strategist a little earlier on Bloomberg Television takes us back to our question of the day. Markets ready for seventy five bids. Joining us now Jay Barry J.P. Morgan's head of U.S. the government bond strategy. Let's call it a dollar bold strategy. Let's talk a bit about 75 basis points. Are we going to need a bigger boat. J. Hey guy good morning and thanks for having me. I think you know our thought process is well you know not sure if we're going to need a bigger boat but maybe we just need to be thinking about the boat moving on for longer to try and avoid jaws. And our base case of J.P. Morgan has been as the Fed has guided us 50 this week and 50 basis points in July and the risk of a series of more 50s after that. But certainly I think the inflation data
on Friday though it showed CPI decelerating year over year it's the fact that it's the more persistent parts of the basket that are related to the labor market. They actually firmed in the fact that the shelter price numbers actually saw their firms run. Rate of the expansion are somewhat worrisome to us. So it definitely runs the risk that the Fed needs to keep going at lot larger increments for a longer period of time. Jay one of the hallmarks of this market has simply been
financial markets investors front running the Fed. I mean 50 basis points a couple of months ago was seen as unheard of. Are we in the same moment with 75 basis points or even 100 basis points which is recently. Think back into the conversation. I mean I think for this week it's hard to think that the Fed will go more than 50. Right. It's already conditioned us to think
that it's going to go 50. You know I think one thing in discussion as the Fed's been raising rates more recently is a desire to not to surprise markets and the fact that it's in its self-imposed blackout right now probably makes it challenging. But I think it's going to be pretty challenging for the chairs to thread the needle on Wednesday afternoon. I mean if he sort
of doesn't leave the door open to 75 at some point or a larger incremental move that means that he risks inflation expectations becoming less anchored than they are. And you know you look at something like five year ahead five year tips break evens. They're basically consistent with 2 percent RTS right now. But you'd run the risk of them rising. And we certainly saw what happened with the Michigan 5 to 10 year ahead expectations on Friday. But if he does sort of quell any notion of a larger than
that. If he doesn't quell that notion then certainly the market could price and not just a seventy five at the July meeting but maybe a series of successive seventy fives because I'm not sure how the market would interpret that off ramp right now. Jay is that what is necessary to convince the market that the Fed is no longer behind the curve. How big does the number need to be in aggregate. And I guess probably what we're talking about here is where does it take us to. Where is the terminal. Right. What does the Fed need to deliver here to convince the market that it is not behind the curve that it's got this
inflation problem and it will control it. So I think it's interesting guy that you look at forward real policy expectations. And finally with the move that we've had over the last couple of days you've got things like real Fed expectations. One year forward into your forward dipping back into positive territory which I think finally makes sense. And
one of the things that we've been focused here on at JP Morgan for basically the whole year is that you went out a year forward and two years forward that those real policy expectations were still a negative real rate territory and they're finally emerging from that. So I think the market's starting to say that we need to get real rates back into positive territory over the next couple of years. And that's with pricing a terminal rate of something like 3 90 right now. So perhaps that's what it's going to take to kind of get us there which is getting policy rates at least in nominal terms something like 150 basis points higher than the Fed's neutral rate all considered. Let's stick with that story of nominal yields because how much farther can we really go if you're looking at a bear market for treasuries that just continues we're looking at 10 year yield of about three. Twenty nine right now. How much farther can that go. How much higher can those yields get. Yeah. So we've actually hit our year and targets basically today. So I'd like to you know saying go home for the rest of the year and sort of call it a year. But
but in reality I think you look at it. The reason we're here is because the market's pricing a terminal rate at very very close to 4 percent. You know we would argue that when you look at valuations through the lens of how the market's pricing the Fed and growth and inflation that valuations have started to emerge as slightly cheap again. But I think there's reason to think
that we can continue to overshoot because the magnitude of this cheapness and this dislocation from our sort of fair value framework is modest. It's not extreme as we saw this time a month ago. And second I think the other big piece of the puzzle here is that the positioning in U.S. fixed income is very light. I think as yields approached 3 percent many of the structural shorts in fixed income were sort of reduced and the markets had gone to focus on monetary policy in Europe. And what was happening in core European government bond markets. So part of the reason why we've moved so aggressively over the course of
the past couple days is that the positioning has been pretty light and people haven't been prepared for this. And at the same time you know something that we've been very focused on is liquidity conditions. They've improved a little bit but they're still pretty weak from historic perspective. And we're still sitting with liquidity conditions that are as bad as they were this time in the spring two years ago. And really where we were at the worst of the financial crisis in 2009. So these moves are getting exaggerated as well. And I think it's hard to say with very little to sort of understand until we get to the Fed meeting on Wednesday. What's going to stop this for the very near-term.
J it's not your wheelhouse but how much attention are you paying to what is happening in high yield right now. The Fed is unlikely to be that concerned with the equity market story but if we start to see cracks there is not going to change the narrative guy. I think we're very focused on what's happening in financial conditions broadly and not just in high yield. I think you know you've clearly seen across spread asset classes that there was a pretty nice recovery from where we were at the wides in the middle of June to where we were just a few days ago. But kind of in the words of our my colleagues and in credit research this morning and credit strategy you know we baking been making narrower sort of higher lows and higher highs here. So I think you know the risk would be that there is some very near term credit widening. But our overall picture here is that the fundamentals
in the credit markets are OK which should sort of prevent a full scale widening. And that's why our forecasts across the spread products are somewhat narrower than current levels. Jay you mentioned financial conditions immediately. My ears perked up because a big chunk of the movement you're seeing there is coming from the stronger dollar story. You focus on interest
rates you focus on the bond story. But how much should we be focusing on the danger associated with that strength in the greenback. You know I think it's a big piece of the puzzle but my guess is the Fed would actually welcome this. Right because if we've been sitting here looking at the inflation numbers surprising to the upside and from the more persistent parts of the basket to the extent that the dollar strength would actually slow growth and actually slow inflation over time I think that on a standalone basis the Fed would probably welcome. But you know I think for you know for the very near term again if we're thinking about the Fed having to move perhaps more hawkish than the market it anticipated that it's gonna be harder for sort of the dollar to stop over the very near term. If the Fed comes out and signals 50 50 50 rather than 75 75 75. How does the market react. Wednesday. I don't think I think the very short end guy would perhaps rally
on the back of that just because we had the relief of the Fed not delivering a seventy five this week but looking at the way we're priced at the very short end of the curve I mean again we're pricing in you know one hundred and seventy five basis points of tightening over the next three meetings. I think that would probably induce a relief rally at the front end because we didn't get it. But again I would be more concerned about the move and longer term yields because if the market saying the Fed's got the green light to go a larger incremental move at some point but doesn't produce it then we run the risk of inflation expectations moving somewhat higher. And in our medium term view here at JP Morgan is that inflation expectations in the market in the form of tips break evens are at risk of you know a Fed that's forced to move into restrictive territory later this year. But locally we'd actually argue that valuations look a little bit cheap. So if the Fed doesn't deliver something
bigger. And as you say sort of teases towards a series of 50 years beyond next week then I think the risk is you'd see longer term yields move higher. The short end relief rally for a short period of time. Jay Barry of J.P. Morgan thank you as always for joining us. More conversation coming up next. This is Bloomberg. It's time for the Bloomberg Businessweek to look at some of the biggest business stories in the news right now and which could get to the German government is reportedly preparing to lend billions to rescue a former arm of Gazprom now under the control of the country's energy regulator. A bailout for Gazprom germanium could come this week with a state owned bank expected
to issue a loan. The money would help ensure supply security after Russia cut shipments in retaliation for Germany seizing the company. Lloyds Banking Group will pay staff more money this summer as the cost of living spirals in the UK. Britain's biggest mortgage lender will make the one time payment in August to more than sixty four thousand employees covering its staff apart from senior executives. That's according to an internal memo seen by Bloomberg. Prices are rising in the UK at the quickest pace in 40 years and a software engineer on Google's artificial intelligence development team has gone public with claims of encountering sentiment on the company's servers after he was suspended for sharing confidential information about the project. The alphabet unit placed Blake Lemoine on paid leave last week and claims he breached the confirms confidentially balloting policy. And that is your latest business flash. Really. Thank you. As always let's get a
quick check on these markets here because read on the screen the sell off is continuing. You're not really seeing a ton of respite really for the broader market. The S&P 500 down to the tune of three point three percent. Of course the Nasdaq taking it harder just shy of 4 percent. And the Russell two thousand down four point two percent. There's a lot going on in these markets but how much of this is driven by the rate story. Take a look at some of the yield moves
here. Tenure yield at three twenty nine basis points. Even the VIX here is much much higher given the volatility. But to me the question is what are you not seeing in perhaps the commodity market. Oil prices for example only down one and a half percent. In a risk off mood like this you'd expect the commodities market to move more but perhaps it's really only reacting more to the dollar. The dollar strength story continues. Japanese yen hitting 135. Earlier this morning. And of course we know that the euro here getting crushed at 1 0 4. We're going to keep you apprised on all of that. Coming up though investors pricing in a more aggressive Fed. Speak to Austan Goolsbee former chair of the
Council of Economic Advisers. That conversation next. This is Bloomberg. I think we were at a crossroads back in mid-May we wrote a piece titled that saying that if the market kind of broke below the thirty eight hundred thirty eight fifty type level exited gross to Karen territory that we'd be pricing in a full recession. We bounced back and we're right now right back at that crossroads. That was RBC is Laurie Calvert Senior earlier on Bloomberg Surveillance. We're about an hour to the U.S. trading session. The selling continues. Boomers Abigail Doolittle is tracking the moves Abby. Well Kristie that was a really interesting question that Laurie Calvert CEO just raised because it is critical
support. Thirty eight hundred more specifically thirty eight 10 or thereabouts at least on the S&P 500 in many futures. Here you can see we are below that level. We are also officially in a bear market for the S&P 500. The question is will we lows close there or will we rise back above important support. We'll take. Taking a look at one chart that we'll be talking about that a little bit later on. But as for bear markets the Nasdaq 100 and many other markets have been in a bear market or down more than 20 per cent for quite some time. The Nasdaq 100 leading the declines down three point seven percent. And it of course is now down about 32 percent from its peak. So a brutal bear market there for the Nasdaq 100 and not a
brief one either. It's a long slow bear market suggesting that there could be much more to come. You have the NASDAQ VIX excuse me the regular VIX or that fear index gauging uncertainty up back above 30. Not at panic levels but it is a significant rise. Of course the pressure for all this inflation fears ride yields yields rising. That two year yield up 16 basis points at an
extraordinary three point to three percent. Just amazing. And of course that spread to the 10 year narrowing and narrowing suggesting the yield curve could flatten or invert once again. That of course is a harbinger of some sort of a recession at some point. And one of the culprits here for reselling that Bloomberg dollar index up nine tenths of one percent. Really very interesting the technicals happening there. Whether or not it will take out its last high. Now if we flip up the
boards and we go to our next element we are going to see that that rising dollar creating problems for a lot of companies. Microsoft not so long ago preannounced to the downside on for profits talking about the headwinds relative to the rising dollar. Here is a look at the companies most exposed to foreign revenue and surprising to me at least most of its big tech. We of course do have deer here at 43 percent but Salesforce.com Microsoft at 50 percent. Alphabet at 54 percent. Met at 56 percent. Apple at 58 percent.
MasterCard at 64 percent. And then the winner here if you will call it the winner did depending on what time time period is in video at almost 84 percent. So this is another big pressure piece of the rates rising story pressure on tech because of course as rates rise typically the dollar is going to rise too. Now rounding it all out with our last element here and we take a look at this it's pretty interesting consolidated way of looking at it. The S&P 500 of foreign revenue exposure down 21 percent on year on the year. The S&P 500 U.S. exposure down eleven point one percent on the year. And of course the S&P 500 itself the
way we usually look at that guy down twenty point nine percent. But this right here shows you just how critical the dollar is in what we're seeing relative to stocks. So it's going to be so important to see whether or not it can take out its last highs. Very close but not yet. Yeah it's interesting you kind of fold that into the story that is happening here in Europe right now. Abigail where we are seeing some aggressive selling in European bond markets kind of reflecting what Abigail Abigail's talking there about what is going on with the dollar. Beekeepers Italian tense now 3 4
percent back through 4 percent. I should say that is a big and critical line in the sand in terms of the spread. You are now seeing over Germany and we are still seeing a sell off of German bunds today. We are now trading 236 basis points over Germany. So BP is over bunds. That is a key metric for fragmentation in Europe. You want to be paying attention to is objectionable of
the ECB is going to be giving a speech tomorrow night at the Sorbonne. Pay attention to that. Speech is going to give you an idea of where we sit currently with the ECB and its thinking on fragmentation. We need to tighten up our thinking around what the ECB is going to do next. We may get some clues at that speech but the euro is under pressure. We're back down into the 1 0 force tracking back down. Pay attention again to that. If the ECB is doing one thing the Fed is doing one thing plus one. And that is going to be the critical issue going forward from here if the if the Fed is delivering. Seventy five rather than
50. Where does that leave the ECB. The really critical things to be watching out for right now but as I say the sell off in European governance is really accelerating. Ali RTS Mohamed El-Erian says the US inflation rate could go higher from here. Recession risks are lifted in a negative way. He was talking about that over the weekend. He spoke to CBS Face the Nation yesterday. I think you've got to be very modest about what we know about this inflation process.
And I fear that it's still going to get worse. We won't get to 9 percent at this rate. Austan Goolsbee former chairman of the Council of Economic Advisers over at the White House. He of course is currently a professor at the University of Chicago Booth School of Business. Austin great to have you on the program. Muhammad is talking
about 9 percent. How high do you think inflation could get. You know I certainly hope that it doesn't go in that direction. I do think you've got to split it a little in the way the Fed does between core inflation and then what's happening with energy and food prices the energy and food prices. It is is heavily coming from from what's happening with the war short on core inflation. That's that was. Sorry. That's fine. But but if you take a look at Friday's numbers and you take a look at what what all of the mentions of core core inflation are telling us right now that telling us that inflation at the core is also getting super sticky and is likely to be so for a long time. So yeah we may not get to 9 percent but we are tracking the
direction of inflation getting broader not narrower. I think that's exactly right. That's what I was going to say is the disturbing part about the last report wasn't the headline number eleven of the twelve months of which we already knew it was that core inflation did not slow down by very much. It was down only a tiny bit and it spread in especially into rent and housing because we because we haven't had supply. I think the next three months. Month to month inflation reports on the core are going to be the paramount critical thing that both the Fed is looking at and for. Whether we get a sense of is this going to go away or if not go away is this going to diminish now over time or are we bundling it up into expectations. And we're going to have to go consult the ghost of Paul Volcker. Austin some of the components of this inflation it's not to your
point just coming from into guy's point as well from those food and oil prices. It's also coming from things abroad things that can't necessarily be controlled. Things like shipping rates things like tariffs over in China. What can the U.S. administration actually do to tackle things that perhaps might not be within American borders. Well we can get rid of the tariffs that would make prices go down. The prices went up pretty substantially on a bunch of these international products when we put them in. But other than that the parts of the inflation that come from geopolitics or that are coming from worldwide supply chain disruptions. Those are common across most of the advanced world. I mean you just
had the segment a few minutes ago about inflation in the UK be running at the highest rate in 40 years. You've got the highest inflation in Japan in 40 years. Highest all over the world. So there's not a lot you can do other than correct mistakes like the tariffs that that were in place already. Also does the Fed have to correct some policy mistakes and hire how high do you think rates have got to go to. Correct. That's the impression certainly given by the market at the moment is that the Fed is still behind the curve. Does the Fed need to be more aggressive here. I think the Fed was behind the curve at least a year ago. It was clear we weren't going to have the meltdown that they feared in March of 2020. So it would have
made sense to move back to a position like normal. But the only thing for the for the most vocal critics who are saying the Fed should raise 10 times even from from here and be hyper aggressive is it makes a big difference. How much of this inflation you think is coming from supply shock and how much is coming from demand. The only tool the Fed has is to raise the interest rate and reduce demand for interest sensitive things. That's the only tool the Fed employs. So if you think this is
predominantly inflation coming from too much demand then that can work. But if you think a lot of this is coming from supply all you do by raising the interest rate and raising unemployment is you generate stagflation. You can't really get rid of the inflation by having high unemployment. So the Fed has got to balance that out and it's going to have to keep an eye as I say on the next three months of numbers to get a sense of is this supply. Is this demand. Is it starting to fade on its own as the
stimulus rolls off or are these events in the war going to just keep piling on to us. Also let's talk about the dollar here because as we talk about inflation the dollar gets stronger and stronger if you're the average American taking a trip to Europe right now. That's a really fun easy and cheap I should say trip to take. But if you were an American exporter exporting food oil that becomes a big big problem for them. How quickly or has this already happened to that. The dollar has become a problem for the United States. It's a it's definitely a problem for exporters as as you highlight and I would also point out that a large fraction of world trade including trade that is not with any country in the United States to other countries trading with each other uses the dollar as the currency to do the transactions. So as the dollar is going up it is going to have a negative impact on U.S. exports and it is going to have a negative impact on trade. So let's go back to the point you were just making just a moment
ago about the cause of this inflation or whether or not a lot of it is down to demand or there are other factors. What is your best guess on that. How much of this is demand do you think. I think at least 50 percent is supply. I think demand was a serious issue. But that in a way what matters is always the delta from last year for for GDP accounting purposes. And so a big government spend in 2020 one of two trillion dollars becomes a minus two trillion dollars in 2022. And even if you think they saved part of the money the fiscal drag is going to be a big number. So the Fed has got in a difficult position in which they're trying to figure out how hard we step on the brakes. How much is going to break on its own because of that fiscal drag
and then how much pent up demand is there for services. Are people going to go twice as long on vacation because they have had to go for a couple of years without going on vacation. Are they going to go back and get their teeth cleaned twice as frequently or get all of those elective surgeries that they that they skipped during Covid. Questions like that. We have no we have no data to look at. In the past because we've never had a services driven recession before. But that's going to matter a lot for how hard the Fed steps on the brink. Often you went right where I was going to ask you next but I'm curious about what the breaking point is there. If you're looking at what some of these markets are selling off on is this baked in assumption
that the average American consumer and arguably the consumer around the world can't handle the inflation can't handle all the costs that are being passed through. What evidence is there that they can't handle it or aren't handling it. Yeah I do. There's kind of two minds. One is the view that what's happening in markets is they don't think consumers can handle inflation. The other is the market thinks the Fed is going to raise the rates a whole lot and maybe more than the economy can handle. And that's
the thing that's going to drive us into recession. And as you start to see the yield curve in Verde it's going to be more that they're going to be more fear on that side of the ledger I guess I'd say. So far there's not much evidence other than consumer confidence measures are very low but there's not much evidence that people's behavior has changed because of inflation. Consumer spending is still one of the stronger parts of the economy and has held up pretty robustly. OK given that I'll stay. What is the greater risk right now from the Fed's point of view doing too much or doing too little. Definitely definitely feels like the risk is recession and the Fed may be doing too little. Given the history that they have
been doing too little. But as I say if you get escalation of the war and the supply chain problems or you get a resurgence of Covid or monkey pox they find out is is turning into a pandemic. Any of those things I think make it all but inevitable that we will have another recession. Let's hope those don't happen and that we get to that. The Fed gets to try to sort out the how hard to break how hard the accelerator. Austan Goolsbee professor at the University of Chicago Booth
School and former chair of the Council of Economic Advisers. Thank you as always for joining us. We always appreciate your time. Coming up Bitcoin plunging alongside the entire cryptocurrency complex in addition to the broad sell off. We're gonna dive into it next. This is Bloomberg. This is Bloomberg Markets Summers could get to. You're looking at a live shot of the principal room coming up. Eric Cantona
Neuberger Berman multi asset CIO joining Bloomberg Television 330 p.m. New York Time. This is Bloomberg. Keeping you up to date with news from around the world is the first word I'm racing to get to. What did former President Donald Trump know about the attack on the U.S. Capitol. And when did he know it. Those are the questions facing a House committee as it sets out today to prove Trump was directly and even legally culpable in the insurrection. The panel says Trump's claims that the 2020 election was stolen were investigated and litigated and that he was told that they were not true by people in his own government and family. Those Steven who led Trump's 2020 re-election campaign will not testify as planned today. The panel says Stevens has a family emergency. HONG KONG Seoul Covid-19 infections amongst overseas travellers jumped to a
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happens. Yeah I think the pattern has been more and more clear that you know the crypto market is heavily influenced by the better macroeconomic environment. If we look back to the second half of 2020 we see that's when bitcoin is sky right rocketed. That's exactly when the U.S. government started the stimulus packages. And then and then like there there was like inflow
massive inflows of cash and liquidity into the crypto market. And now we're seeing the reversal of that. And then like the price is now in decline because of the you know the sharp predictions for of the interest rates in the coming month. Just a headline. Crossing the terminal just a moment ago. Total crypto market value now falling below 1 trillion. This according to Coin Gekko David. So that's out within the last few minutes. So we're now kind of going below some really key levels here in terms of the total value of the market. What happened earlier to Celsius.
What happened earlier to buy NASDAQ. Just walk me through whether these moves are temporary or whether or not there's going to be a longer lasting effect. Sure. So for Celsius I think one of the biggest triggers for the crypto lender is that a lot of people rushed to the platform to withdraw their daring theorem and that actually costs kind of like a life lack of liquidity flip for the platform and and the platform had to parcel withdrawals for their users. In terms of finance I think there was a new investigation regarding finance involvement with a with a stable point Tara which collapsed a few several weeks ago. So those two are those two appear to be the biggest the catalyst for the bear market right now. And of course we are looking at black men once again it's down
almost 17 percent. David this is crazy since until a witness. But I'm wondering do people look at this perhaps as the way they might look at stocks and that this is a buying opportunity. Or has Bitcoin perhaps lost some of its appeal to its broader investor base very quickly here. Yes. According to some of the market participants they think there will there might be a small rally in the near term. But like general trend to long term in the long run it wouldn't be it would still be in the right bear market. OK. They will then leave it there. We're gonna get to watch what's happening here some critical lines being being crushed. I guess you could argue for Bitcoin and other assets today. Some
problems in terms of withdrawal certainly exacerbating the situation. David Pam thank you very much indeed. The European close is nearly upon us. Let me talk to you about some of the price action we're watching and what we're gonna be talking about in the next hour. European equities are under pressure. Maybe less so actually than what we're seeing over in the United
States for the stock 600 down now trading just more than 400 411 were down by two point sixty three percent. We saw some terrible data out of the U.K. a little bit earlier on a negative monthly print on the GDP front. A lot of that down to the withdrawal of things like track and trace and the vaccine story. So a lot of it's healthcare related but nevertheless the momentum in the U.K. economy not good. The dollar going from strength to strength. We're back trading 121 120 130 for the cable rate
would just sub 4 percent on beekeepers right now. Three point nine 8 8 is where we are trading. We got through 4 percent just a few minutes ago. We're backing off that a little bit fragmentation. A key question that we're kind of watching very closely here within Europe is what novel is going to give a big speech tomorrow at the Sorbonne tomorrow evening. We're going to watch that very carefully. She's going to talk about fragmentation risk. So we're certainly going to want to find out about exactly what is happening there in terms of what we've got coming up on the European close Peugeot Coomera. It's going to be joining us from Toronto Dominion Bank T.D. Bank senior European rate strategist. She's going to be talking about this
very issue that we're facing here trying to figure out exactly whether or not we are going to be seeing fragmentation European risk and whether or not actually we are going to be finding ourselves in a situation where the ECB does need to relax. We've definitely got a problem now for the ECB that the Fed looks like it may be going a little bit more aggressively. European markets certainly watching this debate very very carefully. But it feels at the moment over in the states we're watching what's happening with high yield. We're also watching happening what's happening with the equity market over here. It feels very much like the rates risk is absolutely front and center. What is happening with the guilt story is interesting. Big move there. But what is happening on the continent cause the periphery is really worth paying attention to. And that's the story that we're gonna be
focusing on next. It is impacting what is happening in the foreign exchange markets. These stocks 600 a certain reflection of this. But I think over here pretty it is a very different story to the one you're watching over there. It absolutely is. And I think that's going to get going to be one of the main themes the idea that the entire world is on a different policy path the previously the ECB in the BMJ and then throw in the Fed who is actually leading the charge in an era or in the last 10 years where the Fed has really been the driving force. Absolutely. The European close is coming up next. All of this in focus. This is Bloomberg Daybreak.