2024 Inflation Outlook, China Demographics, GDP VS Corporate Profits: Bluford Putnam, Managing Director and Chief Economist, CME Group

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Bluford (Blu) Putnam is Managing Director and Chief Economist of CME Group. He is responsible for leading global economic analysis and monitoring developments in the price patterns, volatility and correlations of futures and options markets.

Prior to joining CME Group, Putnam gained more than 35 years of experience in the financial services industry with concentrations in central banking, investment research and portfolio management. He started his career as an economist with the Federal Reserve Bank of New York and later moved to the Chase Manhattan Bank. He has served in London as Morgan Stanley’s Global Bond Strategist and Kleinwort Benson’s Chief Economist. Moving into portfolio management, he has held positions as Chief Investment Officer for Equities and Asset Allocation at the Bankers Trust Company in New York and President of CDC Investment Management Corporation.

Transcript

00:00 let's just start like, you know, right at the top. Let's

00:03 start with the inflation outlook and has it already

00:07 gotten back to 2%? Oh, yeah. You can flip to that chart. So,

00:13 here's the deal. The reason we're not at 2% on all the

00:17 metrics. There we go. The reason we're not at 2% is

00:21 something called owner equivalent rent and we've

00:24 talked about that before. I mean, everybody OER. This is

00:29 where it's it's 25% of the headline inflation number.

00:33 It's huge and you know, it's a fiction. You rent your house

00:38 to yourself. You pay yourself the money and that money

00:41 actually gets counted in personal income statistics and

00:44 supposedly you can spend it. Give me a break. That's not

00:46 going to happen. So, you know, I don't like taking things out

00:50 of the CPI and stuff but you know, this one's a fiction. So,

00:53 if you take it out, we're at we're below 2%. We've been

00:58 below 2% for 3 months. We've already hit the feds targets.

01:02 You know, and I think the market over the last couple of

01:05 weeks has really come to realize that inflation is not

01:09 the issue. We're not going back to six, 7% inflation. You

01:14 know, we're we're in great shape on the inflation outlook.

01:18 Okay. So, go ahead. So, are we so is it like green light by

01:21 stocks then like if the feds done and we're in great shape

01:25 on inflation, doesn't that just mean the economy is going to

01:27 boom? What are your thoughts here on the overall economy

01:30 then? Well, I think you need a yellow light. A yellow light.

01:35 Okay. Yellow light. Um here's the the problem. Inflation, you

01:41 know, if I'm you know, if you take my view that inflation

01:44 really has come down to a very reasonable level, then what

01:49 you gotta worry now is about slow down in the economy and

01:52 you also have to worry about the fed staying higher longer.

01:55 The fed doesn't buy the story that I just gave you, okay?

01:59 They're looking at core inflation is still but little,

02:02 you know, between three and three and a half all because of

02:05 the shelter problem and so they could keep rates higher for

02:09 longer and and we're all going to see a slowdown in the labor

02:13 market in 2024. I mean, labor force isn't growing as fast as

02:16 it was. The the post pandemic recovery has really played out.

02:21 You know, we're we're going to be creating probably just

02:24 between fifty and 100 thousand jobs a month on average next

02:27 year. Much lower. Um so so you only get a yellow light for

02:32 equities because the green light is bond yields are are

02:36 lower so you can buy equities. Uh the yellow light is well,

02:40 wait a minute. Profit growth is slowing. The economy is

02:43 slowing. Let's let's at least be slightly cautious. So, we

02:47 shouldn't look for the the kind of, you know, market that we

02:51 had 2009 through 2021. Well, you know, we had zero interest

02:57 rates in QE and I think they had a huge effect on the market.

03:01 Uh so, I wouldn't uh I wouldn't go back there. This is an

03:04 interesting chart. The gray line is the nominal GDP. So,

03:10 that's real GDP plus inflation. The blue line is

03:13 corporate profits for the whole economy. This is an SMP. This

03:18 is GDP data for every company in the in the country and you

03:22 can see in the 80s and 90s, uh corporate profits didn't grow

03:26 all that fast and then after we got 1% rates from Greenspan and

03:30 0% rates for uh from Bernanke and Yellen and Powell, you

03:35 know, corporate profits took off. You know, when capital is

03:39 virtually free, companies go for growth and when they go for

03:43 growth, they get some. Uh by the way, that era is ended.

03:48 Okay, everyone talks about deficits, right? And uh the

03:52 huge deficit we have and growing as we speak. How much

03:57 do budget deficits matter for the economy and the markets? You

04:01 know, it's really an interesting question because a

04:04 lot of people do focus on budget deficits and the larger

04:07 the deficit, they think that's an easier, more expansionary

04:11 policy. Eventually, bond yields would have to rise. Maybe you

04:15 get inflation, things like that. I don't believe any of

04:18 that. I don't believe that budget deficits matter very

04:20 much for the economy and for inflation. What I do believe is

04:25 that expenditures matter. What the government spends. If the

04:29 government spends a lot of money like the $5 trillion

04:32 they spent during the pandemic, we're going to get inflation,

04:36 okay? But that's spending. It hasn't totally gone away

04:40 because we're spending more now but it's predominantly

04:43 military spending. Military spending is 90, 95% spent in

04:48 the United States. So, it's still been stimulated,

04:51 stimulative in 2023. Um but when I when I look at fiscal

04:56 policy, I think we're going to have a very tight fiscal

05:00 policy over the next 10 years but I define tight is virtually

05:05 no growth in discretionary expenditures by the government.

05:10 Now, if you define tight or loose based on the budget

05:13 deficit, you're going to think, wow, the budget deficit is

05:16 getting huge. It's a trillion dollars a year already and

05:19 growing. Uh interest, excuse me, interest expense is a

05:23 trillion dollars a year and growing. Fastest growing item

05:25 in the budget but the budget deficit is just telling you

05:29 that the government has to issue more debt and yeah, maybe

05:32 that pushes bond yields a touch higher but I it's it's not a

05:36 big thing. It will be a, you know, maybe in 15 years, 10

05:40 years, I don't know. At some point, it's going to be too

05:43 large and we're going to have a huge problem but we're not at

05:46 that stage yet. Uh one thing that that markets need to

05:51 exhibit for for me is like lower, lower volatility. I

05:55 mean, these bonds are trading like, you know, bonds and

05:59 related equities to that or just there's a gap and it's

06:03 just all over the place. I like stability. I want to keep

06:07 rates right here. I don't want a recession. I don't want to

06:09 see 6%. I don't want to see 3%. Our large abrupt price

06:13 gaps increasingly, are they going to continue? Oh yeah, you

06:17 put up an interesting graphic I like to show here. This is a

06:20 pot of water boiling and you know, we understand what a

06:24 liquid is. So, we understood what the, you know, the economy

06:27 look like in 2010, 2015, whatever and we understand a

06:31 gas to some extent. We understand what a new state of

06:33 the economy might look like but man, when you go from one

06:37 state to the next, you're in transitions. We're going to

06:40 transition to higher rates. We just finished the transition

06:43 out of the pandemic. We got climate transitions. We got

06:46 geopolitical transitions. All of the chaos of the transition

06:51 is at the surface. The little bubbles, that's where the chaos

06:55 is and that's the hardest thing to predict. Uh and so, I don't

06:59 think you have a chance at consistently lower volatility

07:03 for a while. We got too many transitions going on. And then,

07:08 will that continue into the FX market? We're not FS experts

07:13 here but the entry rate differentials between you know,

07:18 across the globe here, is that going to, is that going to

07:21 wreak havoc on the markets? Well, I don't think what

07:25 happens in FX has too much to do with US equities. Um but I

07:30 do think we get a lot of FX volatility. You know, the the

07:33 Federal Reserve was first to raise rates. The ECB followed

07:39 but they're going to end up at a lower peak rate. Bank of

07:42 Japan hasn't even started. Um you know, they're still at their

07:46 policy rate is minus ten basis points and they will raise

07:49 rates in 2024 but very very slowly. So, we're going to end

07:53 up with some pretty solid wide interest rate differentials.

07:58 And that tells me that we'll have a lot of instability in

08:02 foreign exchange. Okay. In the last week or two, you know, the

08:06 the dollar's been just a touch weaker against the Euro and the

08:10 yen just in the last three or 4 days and that's because of you

08:13 know, the the more optimism about inflation and maybe the

08:16 Fed can cut uh but longer term, I think US rates are going to

08:21 end up higher than European rates and way higher than

08:23 Japanese rates. Yeah, let's get into China. Of course, their

08:27 demographics have been struggling and overall

08:30 struggling, right? Uh we've been seeing where's the demand?

08:34 When is it going to come back? Are we going to see it? Um so

08:40 these are interesting charts. They're called population

08:43 pyramids. The one on the left is 1990 for China. Uh the young

08:47 people are at the bottom working ages in the middle

08:50 retirees at the top. Nineteen ninety is the sweet spot for a

08:54 fast growing economy. A lot of young workers, no retirees.

08:57 Then you go to 2020. The growth in the young people is zero and

09:03 you got a lot of retirees. So, you know, that that sweet spot

09:06 is gone and then if you look at the future, they have even,

09:10 they actually have a shrinking population in China after about

09:14 twenty twenty-five and uh and a massive increase in uh the over

09:19 sixty-five cohort. It's going to be a slower, much much slower

09:24 growing economy and that's before I even talk to you about

09:27 property market, debt overhang, uh 20% youth unemployment, all

09:32 these headwinds for China. Uh but China had three decades

09:36 where it could grow at 10% and they built infrastructure. They

09:41 used all that labor. They moved people from the rural to the

09:45 urban. They did lots of things right. Um but now, it's not

09:49 really right or wrong anymore. They're just way older. Uh

09:53 nothing wrong with getting older except that uh you're a

09:55 little less productive. In fact, uh you tend to retire. So,

09:59 uh you know, that that economy is not going to be a 10%

10:04 economy. It'll in fact, it'll probably be lucky to be a 3%

10:07 over the next 10 years.

10:11 [BLANK_AUDIO]

2024 Inflation Outlook, China Demographics, GDP VS Corporate Profits: Bluford Putnam, Managing Director and Chief Economist, CME Group

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