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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. The US Federal Reserve

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Speaker 1: is cutting rights for the first time in four years,

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Speaker 1: sending equity markets here to new heights. But our investors

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Speaker 1: factoring in every risk.

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Speaker 2: Equity is a price for perfection, and there's a lot

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Speaker 2: of things that could happen between now in the next

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Speaker 2: six months. Say that could upset this. I think great

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Speaker 2: equilibrium that we've had of strong earnings growth going into

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Speaker 2: a FED cutting cycle.

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Speaker 1: What are the biggest risks at faces right now going forward?

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Speaker 2: Federal government is stretched. No one has any plan to

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Speaker 2: fix the situation.

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Speaker 1: The US economy is growing just shy of three percent

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Speaker 1: quarterly with strong consumer spending power. Unemployment is around four percent,

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Speaker 1: and the pace of inflation has slowed, but the Federal

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Speaker 1: Reserve feels the need to provide rate relief. Our economy

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Speaker 1: is strong overall and has made significant progress toward our

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Speaker 1: goals over the past two years. As a result, confidence

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Speaker 1: among Americans is improving, with October's reading recording its strongest

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Speaker 1: monthly gain since March twenty twenty one. The number of

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Speaker 1: consumers expecting a recession dropped to its lowest level, and

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Speaker 1: optimism about equities hit a new high. It's no surprise

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Speaker 1: given the S and P five hundred and Nasdaq have

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Speaker 1: surged more than twenty percent this year. To date, the

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Speaker 1: US economy has seemingly delivered the impossible and expansion instead

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Speaker 1: of a slowdown, despite the end of the Zerp era

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Speaker 1: in twenty twenty two. This is where interest rates are

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Speaker 1: in the US currently. Analysts expect the Fed to keep

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Speaker 1: cutting from here, with the market pricing in a ninety

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Speaker 1: five percent chance of a quarter percent cut to arpup

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Speaker 1: to the election. Economist Dmitri Vilasis is among them. We

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Speaker 1: visited Hamil Wall Street while we were in New York

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Speaker 1: to discuss if the UIs economy and equity markets are

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Speaker 1: actually unbreakable. Dimitri, thank you so much for having us.

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Speaker 3: In New York. Our pleasure. Welcome to New York. Thank

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Speaker 3: you so much.

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Speaker 1: Last time we did this, it was an Auckland. This

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Speaker 1: is a cut above.

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Speaker 3: Love to hear it.

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Speaker 1: Let's start by talking about the feed. The latest move

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Speaker 1: was a fifty basis point cut half a percent a lot,

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Speaker 1: especially given it was their first cut. It seems though,

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Speaker 1: like the FED has delivered the impossible. You haven't had

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Speaker 1: a recession in America. How do you think this stage

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Speaker 1: of the UIs economy and what the FED has done

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Speaker 1: will age.

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Speaker 2: I think the US economy isn't a really good place.

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Speaker 2: I mean, we have over three percent real growth, inflation

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Speaker 2: is down to run two and a half percent. I

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Speaker 2: mean the fact it's done objectively an incredible job of

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Speaker 2: bringing down inflation without hurting growth too much, without hurting

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Speaker 2: the labor market too much. What I think motivated them

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Speaker 2: to do a fifty basis cut despite this rosy outlook,

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Speaker 2: is that the labor market had slowed down a law

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Speaker 2: when we looked at the data over the summer. If

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Speaker 2: I were the FED, I would say, hey, this is

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Speaker 2: a good thing, and we got to keep it going.

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Speaker 2: And to keep it going, we've got a lower rates

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Speaker 2: And I think that's what led them to start the

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Speaker 2: cutting cycle with a fifty basis point cut.

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Speaker 1: Yeah. I was going to ask you about how much

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Speaker 1: the labor market actually influenced that Feed's decision in your eyes.

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Speaker 1: I mean, there was some economists out there saying they

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Speaker 1: shouldn't have done it if you just look at inflation.

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Speaker 1: But given they have the dual mandate, this was more

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Speaker 1: of a labor market call, you think.

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Speaker 2: I think, as you said, the FED has a dual mandate,

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Speaker 2: which means, you know, the Chairman and the FMC have

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Speaker 2: to decide which side of the mandate to pay attention

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Speaker 2: to at any given point, and this is a kind

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Speaker 2: of risk evaluation exercise. And I think what the FMC

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Speaker 2: judged was that the labor market was weakening, risks were

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Speaker 2: piling up on the labor market side, and there weren't

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Speaker 2: that many upside risks on the inflation side. So I

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Speaker 2: think the thinking has moved from the past two years

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Speaker 2: to thinking a lot more about the labor market and

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Speaker 2: less about inflation because it's less of a problem.

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Speaker 1: Frankly, how is the jobs market in the US currently?

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Speaker 3: It's still fantastic.

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Speaker 2: I mean, the latest job support which we got, which

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Speaker 2: was after the FED cut, was a blockbuster report added

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Speaker 2: around two hundred and fifty thousand jobs, which is very

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Speaker 2: very strong performance.

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Speaker 3: So we still have.

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Speaker 2: A fantastic VU ratio vacancy to unemployed to unemployment ratio.

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Speaker 2: There are still more jobs than unemployed people, and I

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Speaker 2: think that's a great place to be for the US

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Speaker 2: labor market. At the same time, earnings are growing, but

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Speaker 2: they're not growing too quickly to stow inflation concerns, So

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Speaker 2: I think it's in a great place.

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Speaker 1: So it seems like I could say, the perfect amount

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Speaker 1: of opportunity for Americans without having too much wage inflation

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Speaker 1: for employeers, perfectly balanced.

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Speaker 2: One could say, if we could keep it that way forever,

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Speaker 2: and I think that's what the FED would say as well,

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Speaker 2: that's exactly where.

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Speaker 3: You want to be.

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Speaker 1: Well, that can't happen. So what do you think the

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Speaker 1: forecast is from here? Does the hold on to this

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Speaker 1: for a while with the fifty cut and leave it

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Speaker 1: or do they keep cutting at a slower rate or

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Speaker 1: are there some risks and they might have to go

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Speaker 1: the other way?

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Speaker 2: I mean, market pricing suggests that they'll continue the cutting

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Speaker 2: cycle at twenty five basis points intervals. The next meeting

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Speaker 2: has been moved back a little bit so not to

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Speaker 2: coincide with the election, so we'll know on November seven

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Speaker 2: whether they do another twenty five basis point and then

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Speaker 2: another meeting in December. Sherman Powell has hinted that this

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Speaker 2: is the direction he'd like to go. But as I said,

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Speaker 2: there are some hawks risks there because the labor market

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Speaker 2: report came in very strong, so the FED might be

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Speaker 2: inclined to skip a meeting, see how the market's reacting,

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Speaker 2: and then if it needs to keep cutting, it can

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Speaker 2: keep doing that, whether at twenty five or fifty basis point.

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Speaker 2: I think they'll just decided meeting my meeting. They're in

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Speaker 2: a good place. They don't need to pre commit to anything.

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Speaker 2: They can just wait and see how the economy is doing.

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Speaker 1: Just let it run well. Speaking of things running, equity markets,

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Speaker 1: are they just unbreakable in this country at this point?

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Speaker 2: To make sure, Look, I think if we zoom out

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Speaker 2: and think a little bit about you know, where US

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Speaker 2: equities sit on the global value chain. Most of the

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Speaker 2: innovation comes from the United States. It accrues to US companies,

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Speaker 2: and accordingly, you know, all the benefits of that innovation,

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Speaker 2: all that value that's being generated worldwide by things like AI, digitization,

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Speaker 2: et cetera, All those things accrue to shareholders of US companies.

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Speaker 2: So I think the US is well positioned generally to

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Speaker 2: capture most of the fruits of global growth, and it

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Speaker 2: does so via the equity market. So that's the main thing.

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Speaker 2: Just you know, beyond the electoral cycle and the FED

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Speaker 2: cycle and all these things, the fundamentals are just really

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Speaker 2: good and you have strong productivity growth, strong capital deepening.

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Speaker 2: That's all driven by US equity markets. So I think

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Speaker 2: if I just look at it from a purely fundamental perspective,

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Speaker 2: equities are in a good place.

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Speaker 1: You see it in a piece of research that you

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Speaker 1: put out very recently that I've read on my way

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Speaker 1: here and just actually laughed at because you said, there

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Speaker 1: is chaos everywhere. If you look around the world, you know,

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Speaker 1: there's proxy wars, there's potentially unleashed for school stimulus in China.

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Speaker 1: Equity markets don't seem to care about any of this,

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Speaker 1: and least alone US election and coming explain that.

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Speaker 2: I think equity markets, again, you know, valuations are quite stretched,

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Speaker 2: so things are going very well and people are full

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Speaker 2: of optimism. And I think what I wanted to point

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Speaker 2: out in my note was that beyond the United States,

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Speaker 2: beyond the stellar economy that we have here, there's.

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Speaker 3: Actually a lot of turbulence.

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Speaker 2: There's a lot of turbulence in Europe, which is kind

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Speaker 2: of myrod and stagnation and seems to remain.

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Speaker 3: There for a very long time.

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Speaker 2: There's obviously conflict in the Middle East that could easily escalate.

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Speaker 3: To something much worse.

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Speaker 2: And there's everything that's going on in China, and it's

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Speaker 2: a big question whether the government will be able to

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Speaker 2: stimulate the economy successfully or not, and what kind of

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Speaker 2: geopolitical risks are associated with that around China. So I

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Speaker 2: equities a price for perfection, and there's a lot of

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Speaker 2: things that could happen between now in the next six months,

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Speaker 2: say that could upset this I think great equilibrium that

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Speaker 2: we've had of strong earnings growth going into a FED

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Speaker 2: cutting cycle.

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Speaker 1: Well, let's focus on the domestic economy and the US.

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Speaker 1: I do want to talk to you about the election

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Speaker 1: and the federal deficit and what could perhaps happen there.

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Speaker 1: But just on the UIs economy, what are the biggest

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Speaker 1: risks at faces right now going forward?

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Speaker 2: Well, I think Madison, you actually hit the nail on

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Speaker 2: the head there. Fiscal is probably the biggest risk. There

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Speaker 2: was another thing I was concerned about, which was a

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Speaker 2: very low savings rate, which we had at the beginning

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Speaker 2: of the year. But the latest revision to the national

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Speaker 2: economic data suggests that the savings rate was actually much

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Speaker 2: higher than we thought. It's over five percent, which is

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Speaker 2: a comfortable place to be. The consumer is not actually

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Speaker 2: a stretch stretched as we thought, so we're likely looking

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Speaker 2: at a continuing strong consumer. The fiscal deficit, on the

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Speaker 2: other hand, federal government is stretched. No one has any

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Speaker 2: plan to fix the situation, and I don't think any

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Speaker 2: electoral outcome is likely to make it a lot better.

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Speaker 3: We don't know who's going to be elected.

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Speaker 1: It's anyone's geese the polls and Nick and Nick I

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Speaker 1: typically don't like to talk about politics, but let's just

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Speaker 1: focus on that deficit. You mentioned that no candidate has

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Speaker 1: any desire to decrease it. Who could increase it more?

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Speaker 1: And how inflationary could that be and perhaps have to

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Speaker 1: lead to a federal reserve response.

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Speaker 2: So I mean, let's take the things one by one.

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Speaker 2: As you know, here in the United States, it's not

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Speaker 2: the president. It is Congress that decides fiscal policy. So

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Speaker 2: the composition of Congress will matter at least as much,

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Speaker 2: if not more, as who is going to be the

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Speaker 2: next president. If it were to end up in a

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Speaker 2: situation where Donald Trump is president with a Republican Congress.

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Speaker 2: I think that's a more adverse outcome for the fiscal deficit,

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Speaker 2: just because the promises has given of significant tax cuts

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Speaker 2: are only estimated to be far larger than the ones

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Speaker 2: that Democrats have, and I think we would end up

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Speaker 2: in a deficit situation. There's a lot of other things

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Speaker 2: that Donald Trump had in mind for the economy that

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Speaker 2: could affect the deficit, end the FED response, and I'm

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Speaker 2: happy to go into those. But if, on the other hand,

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Speaker 2: you end up with a divided government, meaning you know,

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Speaker 2: kind of from one party in the White House and

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Speaker 2: then a different party controls at least one chamber in Congress,

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Speaker 2: then I think you'll end up with a more benign

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Speaker 2: outlook for fiscal because whichever government is in opposition and

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Speaker 2: controls the Chamber of Congress will generally want to restrain

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Speaker 2: the president and keep a tighter fiscal outlook.

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Speaker 1: I guess the ultimate question, given we've spoken about how

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Speaker 1: perfect the US economy is right now, it is the

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Speaker 1: center of global finance. We're just off Wall Street right now,

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Speaker 1: does it really matter? Can't America ride that out? Won't

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Speaker 1: the magnificent seven in this country save us?

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Speaker 2: I think in general you know, when you look at

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Speaker 2: it in a kind of decade perspective, American companies and

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Speaker 2: the United States economy will be fine, and I think

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Speaker 2: they will. United States, regardless of the political outcomes, will

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Speaker 2: continue to dominate international innovation and the technological frontier.

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Speaker 3: That's not in question.

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Speaker 2: Where it becomes, you know, A little bit more problematic

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Speaker 2: is for things like the treasurer's market.

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Speaker 3: How much can the government borrow?

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Speaker 2: I like to joke, you know, because of the exorbitant

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Speaker 2: privilege of issuing the US dollar, the United States federal

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Speaker 2: deficits a little bit like those fancy credit cards.

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Speaker 3: They don't tell you what the credit limit is.

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Speaker 2: There is a credit limit, but the only way to

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Speaker 2: find out is by hitting it. And I think that's

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Speaker 2: what has economists concerned, is that we might be getting

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Speaker 2: closer to actually hitting the credit limit of the US

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Speaker 2: federal deficit.

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Speaker 1: But in the meantime, the US can probably continue to

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Speaker 1: live beyond its mains.

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Speaker 2: I think more than any other economy in the world,

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Speaker 2: the US can lived beyond its means. That is a

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Speaker 2: consequence of being the center of global finance and issuing

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Speaker 2: the reserve currency. Now, none of these things are forever

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Speaker 2: as history teaches us, so it's important to be cautious about,

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Speaker 2: you know, how we treat the US dollar, what competition

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Speaker 2: there is to the dollar system, and how America conducts

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Speaker 2: its international financial policy with respect to that. So it's

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Speaker 2: therefore now, but I would caution it's not a given forever.

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Speaker 1: Thank you so much for your time, always good to

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Speaker 1: chat and especially in your home too.

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Speaker 3: Absolute pleasure. Thank you for visiting