Evenflow Macro's Sumerlin on US Shutdown

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00:00Mark, perfect time. We're actually really lucky to have you here today because you nearly got

00:03caught up in the flight chaos inspired by the U.S. shutdown and we've just had the news.

00:08We're progressing now towards a deal. What's your sense of where things are at?

00:12Yeah, I think finally the both sides look like they're going to come together and about eight

00:16to ten Senate Democrats are going to come across the aisle and join Republicans to reopen the

00:22government. Generally in the U.S. when air traffic starts to get shut down, that's the point where

00:27pressure builds and it's unsustainable and so we've really, the airports are a total mess right

00:32now back at home. I have family that's stuck in airports right now and there are people at this

00:37conference that haven't been able to make it here and so that tends to focus the mind and we see it

00:43happening today. It'll take about a week to mechanically reopen the government but I think

00:48we're finally getting close to the end. You obviously have contacts in D.C. Are you able to

00:53share any of what you've been hearing? Yeah, it's just that finally about eight to ten Senate

01:00Democrats have decided to break off room leadership and so the Democrats after having a huge election

01:07night were re-energized to hold out for a broader health care deal and that just wasn't happening

01:14and so both sides traded offers on Friday and they couldn't get there and these Senate Democrats

01:21are basically agreeing that all right we're going to reopen the government, we're going to get a vote

01:26on health care and maybe a few other things that we haven't heard about yet but it's just not

01:32tenable to shut the nation down especially with the Thanksgiving holiday appearing. Well we were

01:37discussing just earlier in the show how choppy things get ahead of a U.S. government reopening.

01:44How should investors position for this? Yeah I mean one of the most interesting things is that we

01:49actually with the government being shut down the government's been collecting taxes but not sending

01:55as much money out and so we've seen the Treasury General account which is the cash account for the

02:02Treasury at the Fed going up and that's literally money coming out of the private economy. When that

02:08gets reversed the Treasury General account can go start to go back down and so we've had tight liquidity

02:14we're going to have a little bit of looser liquidity. Not a gigantic thing but at the margin it could be

02:19a little bit better a couple weeks ahead as that liquidity goes back into the economy. Well another

02:23symptom of the shutdown has of course been the lack of data which has impacted the Fed as well. How hard

02:30is this making life for not just the Fed but for anyone who's trying to predict the Fed's next move?

02:34What are you watching? Yeah that was a very good question. So Chair Powell has said that if the Fed

02:40doesn't have a lot enough data that they won't move in December. I don't quite agree with that

02:45conclusion that if you're in a fog it doesn't mean you can't move at all. But we have good claims data

02:51at the state level so if there was a sudden break in the labor market we would have seen it in the state

02:56level the data that's still being. We get private sector data. You have to be very careful because some of

03:02that private sector data that doesn't give you all the details that the government does is actually

03:08picking up a decline in government employment. And so the Fed gets more than any of us and we can see

03:14that all week long we had Fed speakers say they're not seeing any change yet. And so they have the

03:20they have the best look but that's the that's the best that we can do. I think we'll get as soon as the

03:25government opened we should get the September employment report pretty quickly because that should have

03:30been completed when the government shut down on October 1st. We're probably not going to get the

03:34household survey for October because those phone calls probably didn't happen but we should get a

03:41jobs number because the companies that do that save that data. Yeah you mentioned that private sector

03:46data and we got some last week which showed layoffs among companies were rising as well so we will get

03:53more clues as you say when we get those September figures but what do you feel is the greater concern at

03:57the moment? Is it jobs or is it the stickiness of inflation? I mean within the Fed it's both. I don't think

04:05they should be worried about inflation right now. The way that I think about it is with jobs approaching

04:11below kind of 50,000 a month you have to be very careful about rolling the economy into recession. And if you

04:17do that it takes four years to recover and so you have to be super careful about that. The bigger concern on the

04:22other side is whether or not we're inflating an asset bubble. On inflation itself I think the next impulse

04:28is down in the U.S. because we can see rents which are about 30 percent of inflation they're falling in

04:33the real world. Apartment prices are falling. Single family home rents are low. We can see oil. There's

04:41enough oil out in the world right now and oil prices are falling. And unit labor costs which is

04:47wages minus productivity are running about two percent. And so I think the next impulse is down.

04:53And so for me it's much more about an asset bubble versus recession than about these you know narrow

04:59changes in the inflation rate. On the subject of asset bubbles I give you exhibit A, AI. Is this run-up

05:06that we've seen in those stocks sustainable or do you feel like there's like a dot-com style correction on

05:11the cost? Yeah I think the thing that bothers me the most about the asset prices with AI is a lot of the

05:19valuations that we're seeing 30 to 40 times earnings are more applicable to an asset light type of company.

05:26And so if we think about Facebook in 2005 unlimited potential. They did not need a lot of people in capital.

05:33Tech today is really like an industrial firm where they need a ton of power. They're building a lot of stuff and

05:39they have all of these constraints that a normal company has. And that type of valuation should be

05:45closer to something like 15 times earning. But I don't have a catalyst to tell you why that's going

05:52to change right now. And I think that growth next year is going to be pretty good. And so we probably

05:57we probably keep running for a while. Yeah there's an interesting balance there as well because you

06:02can't see it but off camera here there are a number of billboards other advertising materials spruiking the

06:07benefits that AI are going to bring particularly in terms of lifting productivity. But of course the

06:12other side of the coin is doesn't mean mass unemployment in every industry it touches. So

06:17what's the macro view here? Yeah I mean and so those are consistent where we could have a lot more

06:22productivity and that means we don't need as many people. And so you end up from an investor standpoint

06:27you still end up with a lot of GDP being produced. From a policymaker standpoint you have to worry a lot

06:34about whether we have a transition period where we just don't have as much job creation as we

06:40should. And my view is like if productivity is going to surge everyone's going to be better off

06:46in five to ten years. But I do get a sense that companies now are cutting down on hiring at the

06:52very entry level position. Because when you hire a new worker it takes you one to two years to start

06:58to really get value out of them. And if they are wondering like well in two years is AI going to be

07:03at a stand of a particular place where I'm not going to need as many people maybe I should start

07:09to trim now. And I feel like we're getting to see a little bit of that and that's a worrisome thing

07:13from a policymaker standpoint.

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