Inflation slows, for now. Where will markets and the Fed go from here? And where exactly was the red wave? Are more permanent voting blocks forming? We explore those questions with Bloomberg Opinion's Jonathan Levin and Jonathan Bernstein.
Welcome to Bloomberg Opinion. I'm only this week. The main thing Republicans I hope take away from this is that opposing democracy is dangerous. Running on a platform without having any policies to address the problems that they point out is not necessarily a plus with voters, and having a bunch of flakes and otherwise unqualified candidates can be harmful. Jonathan Bernstein there on the November surprise. It was surprises all around this week, though not just at the ballot box, but also from inflation data on the markets. Let's get straight to all of that with Jonathan Livin. So, Jonathan albanign was this week's CPI print that clearly looked pretty good, and obviously the market has been looking for some good news. We've been plagued by bad reports that were worse than expected all year long pretty much. However, I have to say that a lot of what happened in this report was explainable by a methodological quirk and be the stuff from used car prices that many of us have been expecting. I'm not sure that it dramatically changes the underlying signal for the Federal Reserve. Exactly is the market overreacting. I mean, it's one thing for equities, but you're not saying bonds react to quite the same extent. Yeah, I think that's certainly possible. I mean, one place to look for the underlying signal is what's going on in core services after a shelter and after medical care services. I'll tell you a bit about the quirk that's going on in this month's data. Effectively, health insurance is measured in a very idiosyncratic manner in the Consumer Price Index. The Bureau of Labor Statistics essentially back this out from health insurers retained earnings, and basically you get a new data dump every twelve months, and the Bureau of Labor Statistics ends up extrapolating that over the coming twelve months. And for reasons that are very sort of technical and idiosyncratic and really have everything to do with the strange pandemic economy and very little to do with underlying inflation, health insurance inflation went from being an insane pressure point on the index to a major drag on the index. So what I like to do is I strip out some of these idiosyncratic elements. Right, So if you just look at core services X shelter, which is another weird element in the index, and x medical care services, So stripping out that health insurance effect, you're still looking at something like a zero point five move on the month, which hints at underlying inflation of somewhere around six six and a half percent. It's a little better, I guess, but we're obviously not out of the woods, and the market has started to deprice it in a fifty basis point move and then really nothing until next March. It seems a bit too optimistic. But is the market always right? Yeah? I mean, I think what we're really looking at here is a increasing optimism that they will down shift to fifty, which is not at all surprising. There have been plenty of FED speakers who have been hinting that this is coming. No matter what, right, the firmware reserve really doesn't want to reach its destination point going a hundred miles an hour. It wants to be able to look around as it arrives at its ultimate destination see if the incoming data confirms that it's reaching an appropriate policies stands and be able to adjust accordingly. I don't think that that changes that much in terms of the ultimate destination and how long the FED probably wants to stay there. So if you look at FED funds futures, what they're basically telling us, again not insane, is that maybe that destination is about twenty five basis points lower than we had previously been expecting. Now, what's weird, however, as you're alluding to, is you have stocks. You have the nasdak in the biggest jump since April on that, you know, I think some equity market optimism makes sense, but you would envision from a fundamental standpoint, maybe I move about half as big as the one that you're actually seeing out there. Well, obviously, the other thing this week was the mid terms, and while we will have divided government, most likely it's kind of a strangely divided government at this point. What's more likely stimulus politics or inflation slash debt politics. I think what's most likely is grid luck and not much gets done. So if you're a bit of a politics cynic, maybe you actually see that as a good thing. The biggest risk going into all of this, I think was arguably that an emboldened Republican party might push for some debt ceiling antics and we could have some sort of reprise of the volatility that we saw in two thousand eleven, where Republicans used the debt ceiling as a threat to extract something that they want. Of course, in two thousand eleven, an end result of all that was the United States ended up getting downgraded by Standard and Poors. I don't think that that kind of all atility was something that the market necessarily needed given all of the headwinds here. So if you believe at the margin that maybe the lack of a red wave leads to a less emboldened Republican party and a lesser likelihood of something like that happened, maybe at the margins you could even read this as slightly positive and we'll see if that gets done before the end of the year. It has been the worst year in at least fifty years for the bond market. Do you imagine that that statistical improved by the end of the year? I intenser around now, aunt it's reasonable to think. So. I think a good question is hand bonds actually rally from here. It really seems to me that, you know, if you believe the feds rhetoric, which I do, that they have the short end pinned here. The belly of the curve, the ten year tends to be a place where traders will express a view of raith coming down. Eventually, the ten year part of the curve can definitely rally even as the short end stays put. However, you know what's interesting is that we know that the FED wants to see tighter financial conditions. Chair Jerome Peal mentioned at his last press conference last week that he's not just paying attention to the short end. He wants to see meaningfully positive real rates all throughout the curve. So a question that I have is, should that ten year segment of the yield curve start to rally in any meaningful way, would you then see FED speakers again ratchet up the hawkish rhetoric or could we even face the specter of the FED selling treasuries from its portfolio just to make sure that the curve looks away the FED wants it to look Bloomberg Opinions Jonathan live In more next on Bloomberg Opinion. I'm Vonnie Quinn. I have to say, Jonathan, you call this in a lot of senses when it comes to the issues that voters are voting on, for example, and you know you said that it's not just I'm done, And the only other person I've heard say that is Michael Moore recently. Well I'm not all right, So Jonathan, we're talking Wednesday afternoon. Nevada and Arizona have yet to be called, and it's all but certain that Georgia has headed for a special election December six. However, we do know a lot, an awful lot about US democracy right now. Is it in less trouble than we thought? Yeah? I think so, with huge numbers of caveats about that. We're not out of the woods, and the threats still real and things could change rapidly. But there were a number of positive signs after a very bad start that the primaries. We had some candidates refusing to concede during their Republican primaries. We had efforts to harass election workers all summer in fall. We had in the early voting in Arizona a couple of these clowns show up in military gear observing drop boxes and intimidating voters. But then as elections they came, that sort of dropped off and we didn't get stories, at least not significantly organized efforts at at voter intimidation which was a real fear. We didn't so far as we're speaking. This could change any minute. But Republicans who have lost have conceded properly, normally, and while there are some crazy conspiracies that are circulating, they have not migrated. They have not made the important step of migrating into the mouths of politicians and for the most part, too high profile Republican align media. So the concessions are interesting. As you say, it's sort of back to business as normal, the old politics that we knew and loved. Did something change within the Republican Party. Did these people get the message from leadership that they were to do this? I have not seen any reporting on this. Threats to democracy didn't start with Donald Trump. They have deep routes in the party going back quite some time and having gotten worse. And that's one of the reasons we got Trump. But Trump himself as an outlier. Trump himself feels completely apparently, or at least he does it completely willing to claim fraud no matter what. He doesn't need some sort of pretext. He proclaimed fraud in every election he was on the ballot. Before the election happened, he proclaimed that he was ripped off by fraud. After winning the presidency, the one time you would think that candidate would want to increase respect for elections and confidence in elections, he still said there was sons of fraud that he had no evidence for. And I think that it turns out that when the leader of their party is saying it very loudly, a lot of Republicans go along, either because they think the incentives are there, that they're better off agreeing with the leader of their party, or possibly just because they actually believe it. I think a lot of rank and file voters and some of the candidates come out of the rank and file voter group. You know, they hear a Republican president say something, they say here, well, he may be exaggerating, but there's got to be something to it, or else he wouldn't say it. It turns out Donald Trump is willing to say a lot of things just because he said them, and that is unusual, obviously very dangerous. So that I think helped. I think we got a little lucky so far, at least that most of the losers lost by a substantial amount. Again, if that was trumpet wouldn't stop them from claiming fraud. But you know, normal people if they lose an election by eight, ten, fifteen percentage points, they see what's going on, I mean lucky. But also more people registered and so on. And it was a different election, in fact, a very very different election, one of the kind. Speaking of Trump, dr ols did terribly. It took more money than expected to win. In Ohio, governors that had not had Trump's backing, like Camp and the Wine, they won fine without Trump. Carry Lake is in trouble in Arizona in the governor's race. What position does this all leave Trump in? You know, it's very hard to tell, because there have been other moments where it was clear that Trump was a drag on the party and that his judgment is terrible. You know, he endorsed these candidates who were terrible candidates, and he's not good at this kind of stuff. Now it doesn't bother him. Apparently he was today blaming his wife for his endorsement of doctor Oz. You know, Donald Trump is, of course, the only president we've ever had who repeatedly criticized extreme criticisms of his own cabinet nominees. People he put in his own cabinet turned out to be horrible, horrible people and he never took any responsibility for that. So we've had these points before, and Republican politicians and other party actors and the Republican aligned media have not made the decision to cut him off. And perhaps because they really don't believe that he's arming them, or perhaps because of other reasons. I think the Republican aligned media has ratings incentives. He sells a lot of books, he sells a lot of ads, and increases ratings. So there's that. And I think a lot of candidates are just afraid that he will go after them, even though the evidence isn't really there that he's that much of a threat. But politicians tend to be paranoid about that sort of thing. We'll come back to Trump in a moment. But what kind of lessons should Republicans learn from this election, given that they really didn't do as well as expected, particularly in places like in the Midwest, and it may mean that a sweep in is off the table, for example, mail in voting, should they embrace it? I do think that Republicans, by demonizing mail and voting, are making it more difficult for their own voters. I don't know that there have been any careful studies that actually show that it makes a difference. So that's something I know. I don't think this tells us anything about two years is a huge long time, and there's basically no correlation between what happens in mid terms and what happens in the next presidential election. But I think the main thing Republicans I hope take away from this is that opposing democracy is dangerous, that running on a platform without having any policies to address the problems that they point out is not necessarily a plus with voters, and that having a bunch of flakes and otherwise, you know, unqualified candidates can be harmful. Whether that's the lesson they empirically should take from what happened, I don't know. It takes a long time to study exactly why elections came out as they did, and even if we had all the votes counted, you still have to do a lot of work to actually find the cause of relationships. But what parties take away from things has very little to do sometimes with reality, and more to do with internal interests within the party, internal factions within the party, and how they fight to have their interpretations of what happened become the leading explanations. So, for example, we've already seen anti abortion Republicans organized groups of anti abortion Republicans say that the reason that Republicans lost is because they did from the issue of abortion. Now I don't think that's true. Um yeah, I think in fact, abortion cost them badly and the candidates shied away from it because they knew that it was costing them. But you know, they're going to try to float that and they may be successful. It's a powerful issue within the party among party voters in primaries. More next on Boomer Opinion. I'm Vonnie Quinn. Kevin McCarthy isn't a slam Don christ peaker. I mean, he likely get it, but he may have to do some negotiation. What kind of negotiations do you imagine we'll go on within the Republican Party in order to have them? Well, we don't, even though as I speak that Republicans definitely have the majority. I believe they will have the majority. I believe that the whole time. You just don't avoid a seat loss when you're a president's party. So assume that he gets a majority, but it's a slim majority. There's two steps right first, and this will come up next week on Monday and Tuesday, Republicans going to vote on who they're speaker candidate should be. So in order to do that, he has to win a majority of the House Republicans. But then he has to when on opening day of the new Congress January three, he's going to have to win a majority of the House. And if he has, say, if Republicans have a four or five or six seat margin, he has to hold all of the Republicans. In the old days, that was easy. It was an automatic vote. Everybody knew that you voted for your party's candidate for speaker. In recent years and among the among the House Freedom Caucus types, so you know, um, you those are not automatic votes. And the problem is that we also have with Democrats with I'm sorry, with Republicans picking up several seats in New York for example. Um, we have some Republicans who may be not eager to have a more extreme speaker, and so there's always a possibility will have chaos. The thing is that we've already had some of the extremists in the House Republican conference come out and say, I hope we have a narrow margin. Then I'll have more leverage. Well, the truth is that in real life, you don't have much leverage if you're on the extreme of your party. But they've been able to get away with that partially because the rest of the party lets them. We don't know whether they'll be able to get away with that in the next converse, and they may it if they do. If we have a slim Republican majority that's bossed by the thirty or forty or fifty or sixty most extreme members, it's kind of be a mess. Deinitely have to give up certain things, but I guess we may never know what they may be. Yeah, I mean, it's it's not really clear what he can promise or what, you know, what the demands are going to be, because a lot of these people are not calculating policy interested politicians. These are people whose main goal is to have grievances and and you know, and go on Fox News or you know, the radio talk shows or the more extreme networks and complain about things, including the leadership of the Republican Party. So I'm not sure what he can give some of the extremist members, because they're not interesting. You can't say, oh, yes, I'll give you a vote on this bill that you care about, because that's not what their thing is, that's not what they're interested in. And that's why the Republican Party is not very equipped to run the House. Well, speaking of members and senators that have had power over the last couple of years, does Joe managine have as much power as he had going forward? Um, you know, assuming that Democrats have a majority in the Senate, whether it's fifty or fifty one seats or even fifty two as possible right now, I think get the math in my head. Um, The thing is, if there's a Republican majority in the House, then know, anything that passes and becomes law is going to need a supermajority to get there, because you're going to have to have both Republicans and Democrats, because it's gonna have if anything that becomes law has to get through the republic, if it has to get through a Republican House, it's going to have to get Republican votes in the Senate. It's also gonna have to get Democratic votes in the Senate. So, you know, the same way that the Philip Uster kept him from being the swing vote on a lot of things. Um, of divided government will keep him from being the swing vote on a lot of things. That's well, his energy permitting bill then is in trouble. Well, that said some of the things that if he is an aggressive legislator, it's very possible that he could put together coalitions that are bipartisan coalitions on some things. We just don't know what has any chance to get through the House or representatives. Is the thing that's that's fascinating. The climate change was up there in terms of voter priorities. You know. I my general feeling all this stuff is to wait and look more carefully as more studies go out. You know, it's it's easy for voters to say stuff. Whether that means that and and it's it's interesting what's you know, what they tell posters is on the top of their minds. Whether that actually moved their votes or not is a much more complicated question and sometimes difficult to study. But you know, I think that general the polling over the years has shown that dealing with climate has been a popular position for the last at least decade. And I think one of the things that we get out of one of the ways to think about the election is that Republicans were very, very certain that their issues were wildly popular with voters, But it may be that they were wrong. Jonathan, candidate quality, particularly for Republicans. How big of an issue will it be? Will the more extreme candidates be dismissed now more quickly, or should we expect to see more fringe candidates and maybe not so fringe candidates, maga candidates running in primaries against other Republicans. You know, it's certainly true in the media aftermath that one of the things they're fixating on is candidate quality. Now, the question becomes, can you be a party of anti democratic conspiracy thinking and recruit decent candidates? So they didn't just by coincidence, have a unto lousy candidates. They had a bunch of lot of the candidates in part because their voters wanted to hear crazy conspiracy thinking, and in part because solid regular politicians weren't willing to run in Republican primaries because they didn't want to be beat up for saying things like, oh, yes, Joe Biden won the election. Yeah. So, you know, the thing is, it's it's easy to say, oh, we had a bunch of bad candidates, but the bad candidates weren't just a coincidence that happened to happen or that was It's not just about Donald Trump's bad judgment in endorsements. It's also about what the party is right now, and they have some deep problems, and the last of the first hours after the election, it could be worse in terms of what their reaction is, but we still have to see what it's going to be like. One of the things we've been speaking about over the last several weeks and months, Jonathan, is this idea that there will be a lot of investigations in a scenario where there's a Republican House majority. Now there is one, or there's very likely to be one, not as far the majority though, as we thought. Does that mean that some of these investigations will get forgotten about. I don't think so. I think my guess is that any kind of modesty about what happened will disappear very very rapidly in long House Republicans and as long as they have a majority, they're going to do what they would do if they had a fifty or seventy seat majority. Um, they may have some limitations in terms of what they could do on the House floor. In terms of impeachments, say they have a four seed margin, they may not be able to do a whole bunch of impeachments that have no basis in fact um, whereas if they had a sixty seed majority they probably could. Of course, those impeachments would go nowhere in the Senate because Democrats are you know, even if Democrats don't have a majority, they certainly will have enough votes to block conviction. But in terms of committee hearings, as long as Republicans have a majority, they will organize the committees, and they will fund the committees, and they will support investigations. And given who the people are who would possibly be chair of those committees, they're not going to be you know, sober investigations of you know, real wrongdoing or policy oriented. They're going to be going after whatever craziness that the Republican online media tells them to go after. I have to ask you about the special election. We know how much is at stake in this election. Thank you for being with me, and I'm grateful that we are together every step of the way. I wanted to thank you guys for hanging in And if you saw him, you have to go home. You can wake up tomorrow morning see that the new senator. But you great State of Georgia. A lot's going to happen between now and months time, obviously, but can want not to do better if there's another debate, for example, you know, I sort of would guess that, on the one hand, a inexperienced challenger who has had his qualifications questions might have some advantages over time as they yet more used to campaigning. However, it's not clear that herschel Walker is the kind of candidate that will improve over time. And you know, we've had a lot of scandals coming out about mirschell Walker, and there's every possibility that this is not the final scandal that we've seen about him. And having another month to have reporters digging and presumably opposition researchers digging into his past, who knows what could be turned up. So you know, I can't you know, I don't want to speculate too much, but I would say that anything that we normally think would be the case. Who knows in this situation, the libertarian vote in that state will also play a role, presumably, and also the fact that it's just one against one there's no sort of other you know, there's no governor's race being thought out that same day, for example. And you know, well, and the thing is that as of this moment, we don't know for sure that this will be the difference maker. If it is once again the majority of the Senate on the line, I would say that what we learned for two years ago is that when the majority of the senators on the line, interest in special elections in Georgia is very, very high, and I don't see any reason to think that would change this time. No, speaking of interest rising stars, it does seem like many of the governors were allowed to stay in place, or that perhaps leadership at state level was a little bit more robust than we might have thought in advance. Do you see any rising stars out there for either party? Well, you know, in Florida, which is becoming a much more republican state, the governor there one reelection by a very large margin, and you know, is now off on a presidential campaign. Will see how that goes. We had some new candidates on the Democratic side, the new governor of Maryland, who is very popular in New York, having on Robin Hood and he's very well known to the state Jerseum. You know, he's the third black governor to be elected ever in the United States. And we have the first and possibly the first and second lesbian governors in the United States, one in Massachusetts and possibly one in Oregon. And so, you know, breaking barriers is always a notable thing, um. And then we'll see how they how they fare in governing. It's certainly, um, one of the things that happened overall, as I speak, it may wind up being not such a bad election for Republicans if they do wind up with a Senate majority, which certainly could happen. Um. Maybe the Democrats have a slight edge in the Senate right now. But at the state level, there are four states that have new democratic unified government, and so they are going to be passing presumably some high priority democratic legislation and presumably some things that Democrats in the national scene will want to run on in the future. So that will be interesting. That's they're all a states, Massachusetts, Maryland, Michigan, and Minnesota, so that will be interesting too to see how some of those states. And also we do have you know, and we do have trying to think of other Republican standouts from from the elections. But certainly I think Fetterman is going to be an interesting national politicians. The new senator from Pennsylvania. I think the governor, the new governor of Pennsylvania Democrat is going to be interesting. We also have, in addition to Florida, we had governors re elected to a second term in um, in Michigan in particular, in other states where some of them you know, will now be looking presumably at the presidency either in so you know, that's where presidential candidates come from, and we'll start to see some of that. In terms of legislation, Are we likely to see more now in the lame dog session than we would have in a different scenario. Um, that's a good question. Um, if Democrats wind up winning in both Arizona and Nevada in the next couple of days and hold the Senate majority than truction, where is going to be in a much less urgent situation in terms of confirming judges and executive branch positions during the lame duck, which will free up some floor time for other things. Whether they do other things or not, I don't know. You know, I certainly think that they should deal with the debt limit. I think that's the number one priority, even higher really than judges, to get that at least off the table for the next two years, and preferably to permanently and um the debt limit wellally, since we don't fully know yet are we going into recession or and what would happen in that scenario, would there be some kind of stimulus coming from the federal government, And I think that's right that that you know, as we move through the end of the year, it is possible Democrats will not expect any stimulus to come out of a House that's led by Republicans, So anything that they want to get done would have to come there. Now, whether whether they're going to want to do stimulus given inflation, that's something that the economics portion of the party is going to have to weigh in on, and then you know, we'll see what the politicians feel about it. But you know, that certainly is exactly right something else that they may want to look at. Before the before the gas prices started to go back up again because well sort of fortuitous and also I mean, I guess self imposed that gas prices went down slightly because of the spr releases and so on, but that might become a problem again. Yeah, I mean, the gas prices were sort of weird because they had They did go up for a month and then headed back down, and that may have actually accounted for some of the UM surge in the polls Republicans that didn't that then didn't work out, didn't materialize. It's possible. It's that's very seculative at this point, but it is. You know, it certainly seems to have some correlation that gas prices have some correlation with approval ratings, and presumably um you voters who care about inflation seemed to fixate more on gas prices than anything else. Bloomberg Opinions Jonathan Bernstein, and do please weigh in. You can email me at v Quinn at Bloomberg dot net. We love to hear from you. Bloomberg Opinion airs every weekend on Bloomberg Radio and every Friday as a podcast on Apple, Spotify or your favorite podcast platform. We're produced by Eric mollow Till next time on Bloomberg Opinion