Speaker 1: The information provided in this program is of a general
Speaker 1: nature and is not intended to be personalized financial advice.
Speaker 1: We encourage you to seek appropriate advice from a qualified
Speaker 1: professional to suit your individual circumstances. The US Federal Reserve
Speaker 1: is cutting rights for the first time in four years,
Speaker 1: sending equity markets here to new heights. But our investors
Speaker 1: factoring in every risk.
Speaker 2: Equity is a price for perfection, and there's a lot
Speaker 2: of things that could happen between now in the next
Speaker 2: six months. Say that could upset this. I think great
Speaker 2: equilibrium that we've had of strong earnings growth going into
Speaker 2: a FED cutting cycle.
Speaker 1: What are the biggest risks at faces right now going forward?
Speaker 2: Federal government is stretched. No one has any plan to
Speaker 2: fix the situation.
Speaker 1: The US economy is growing just shy of three percent
Speaker 1: quarterly with strong consumer spending power. Unemployment is around four percent,
Speaker 1: and the pace of inflation has slowed, but the Federal
Speaker 1: Reserve feels the need to provide rate relief. Our economy
Speaker 1: is strong overall and has made significant progress toward our
Speaker 1: goals over the past two years. As a result, confidence
Speaker 1: among Americans is improving, with October's reading recording its strongest
Speaker 1: monthly gain since March twenty twenty one. The number of
Speaker 1: consumers expecting a recession dropped to its lowest level, and
Speaker 1: optimism about equities hit a new high. It's no surprise
Speaker 1: given the S and P five hundred and Nasdaq have
Speaker 1: surged more than twenty percent this year. To date, the
Speaker 1: US economy has seemingly delivered the impossible and expansion instead
Speaker 1: of a slowdown, despite the end of the Zerp era
Speaker 1: in twenty twenty two. This is where interest rates are
Speaker 1: in the US currently. Analysts expect the Fed to keep
Speaker 1: cutting from here, with the market pricing in a ninety
Speaker 1: five percent chance of a quarter percent cut to arpup
Speaker 1: to the election. Economist Dmitri Vilasis is among them. We
Speaker 1: visited Hamil Wall Street while we were in New York
Speaker 1: to discuss if the UIs economy and equity markets are
Speaker 1: actually unbreakable. Dimitri, thank you so much for having us.
Speaker 3: In New York. Our pleasure. Welcome to New York. Thank
Speaker 3: you so much.
Speaker 1: Last time we did this, it was an Auckland. This
Speaker 1: is a cut above.
Speaker 3: Love to hear it.
Speaker 1: Let's start by talking about the feed. The latest move
Speaker 1: was a fifty basis point cut half a percent a lot,
Speaker 1: especially given it was their first cut. It seems though,
Speaker 1: like the FED has delivered the impossible. You haven't had
Speaker 1: a recession in America. How do you think this stage
Speaker 1: of the UIs economy and what the FED has done
Speaker 1: will age.
Speaker 2: I think the US economy isn't a really good place.
Speaker 2: I mean, we have over three percent real growth, inflation
Speaker 2: is down to run two and a half percent. I
Speaker 2: mean the fact it's done objectively an incredible job of
Speaker 2: bringing down inflation without hurting growth too much, without hurting
Speaker 2: the labor market too much. What I think motivated them
Speaker 2: to do a fifty basis cut despite this rosy outlook,
Speaker 2: is that the labor market had slowed down a law
Speaker 2: when we looked at the data over the summer. If
Speaker 2: I were the FED, I would say, hey, this is
Speaker 2: a good thing, and we got to keep it going.
Speaker 2: And to keep it going, we've got a lower rates
Speaker 2: And I think that's what led them to start the
Speaker 2: cutting cycle with a fifty basis point cut.
Speaker 1: Yeah. I was going to ask you about how much
Speaker 1: the labor market actually influenced that Feed's decision in your eyes.
Speaker 1: I mean, there was some economists out there saying they
Speaker 1: shouldn't have done it if you just look at inflation.
Speaker 1: But given they have the dual mandate, this was more
Speaker 1: of a labor market call, you think.
Speaker 2: I think, as you said, the FED has a dual mandate,
Speaker 2: which means, you know, the Chairman and the FMC have
Speaker 2: to decide which side of the mandate to pay attention
Speaker 2: to at any given point, and this is a kind
Speaker 2: of risk evaluation exercise. And I think what the FMC
Speaker 2: judged was that the labor market was weakening, risks were
Speaker 2: piling up on the labor market side, and there weren't
Speaker 2: that many upside risks on the inflation side. So I
Speaker 2: think the thinking has moved from the past two years
Speaker 2: to thinking a lot more about the labor market and
Speaker 2: less about inflation because it's less of a problem.
Speaker 1: Frankly, how is the jobs market in the US currently?
Speaker 3: It's still fantastic.
Speaker 2: I mean, the latest job support which we got, which
Speaker 2: was after the FED cut, was a blockbuster report added
Speaker 2: around two hundred and fifty thousand jobs, which is very
Speaker 2: very strong performance.
Speaker 3: So we still have.
Speaker 2: A fantastic VU ratio vacancy to unemployed to unemployment ratio.
Speaker 2: There are still more jobs than unemployed people, and I
Speaker 2: think that's a great place to be for the US
Speaker 2: labor market. At the same time, earnings are growing, but
Speaker 2: they're not growing too quickly to stow inflation concerns, So
Speaker 2: I think it's in a great place.
Speaker 1: So it seems like I could say, the perfect amount
Speaker 1: of opportunity for Americans without having too much wage inflation
Speaker 1: for employeers, perfectly balanced.
Speaker 2: One could say, if we could keep it that way forever,
Speaker 2: and I think that's what the FED would say as well,
Speaker 2: that's exactly where.
Speaker 3: You want to be.
Speaker 1: Well, that can't happen. So what do you think the
Speaker 1: forecast is from here? Does the hold on to this
Speaker 1: for a while with the fifty cut and leave it
Speaker 1: or do they keep cutting at a slower rate or
Speaker 1: are there some risks and they might have to go
Speaker 1: the other way?
Speaker 2: I mean, market pricing suggests that they'll continue the cutting
Speaker 2: cycle at twenty five basis points intervals. The next meeting
Speaker 2: has been moved back a little bit so not to
Speaker 2: coincide with the election, so we'll know on November seven
Speaker 2: whether they do another twenty five basis point and then
Speaker 2: another meeting in December. Sherman Powell has hinted that this
Speaker 2: is the direction he'd like to go. But as I said,
Speaker 2: there are some hawks risks there because the labor market
Speaker 2: report came in very strong, so the FED might be
Speaker 2: inclined to skip a meeting, see how the market's reacting,
Speaker 2: and then if it needs to keep cutting, it can
Speaker 2: keep doing that, whether at twenty five or fifty basis point.
Speaker 2: I think they'll just decided meeting my meeting. They're in
Speaker 2: a good place. They don't need to pre commit to anything.
Speaker 2: They can just wait and see how the economy is doing.
Speaker 1: Just let it run well. Speaking of things running, equity markets,
Speaker 1: are they just unbreakable in this country at this point?
Speaker 2: To make sure, Look, I think if we zoom out
Speaker 2: and think a little bit about you know, where US
Speaker 2: equities sit on the global value chain. Most of the
Speaker 2: innovation comes from the United States. It accrues to US companies,
Speaker 2: and accordingly, you know, all the benefits of that innovation,
Speaker 2: all that value that's being generated worldwide by things like AI, digitization,
Speaker 2: et cetera, All those things accrue to shareholders of US companies.
Speaker 2: So I think the US is well positioned generally to
Speaker 2: capture most of the fruits of global growth, and it
Speaker 2: does so via the equity market. So that's the main thing.
Speaker 2: Just you know, beyond the electoral cycle and the FED
Speaker 2: cycle and all these things, the fundamentals are just really
Speaker 2: good and you have strong productivity growth, strong capital deepening.
Speaker 2: That's all driven by US equity markets. So I think
Speaker 2: if I just look at it from a purely fundamental perspective,
Speaker 2: equities are in a good place.
Speaker 1: You see it in a piece of research that you
Speaker 1: put out very recently that I've read on my way
Speaker 1: here and just actually laughed at because you said, there
Speaker 1: is chaos everywhere. If you look around the world, you know,
Speaker 1: there's proxy wars, there's potentially unleashed for school stimulus in China.
Speaker 1: Equity markets don't seem to care about any of this,
Speaker 1: and least alone US election and coming explain that.
Speaker 2: I think equity markets, again, you know, valuations are quite stretched,
Speaker 2: so things are going very well and people are full
Speaker 2: of optimism. And I think what I wanted to point
Speaker 2: out in my note was that beyond the United States,
Speaker 2: beyond the stellar economy that we have here, there's.
Speaker 3: Actually a lot of turbulence.
Speaker 2: There's a lot of turbulence in Europe, which is kind
Speaker 2: of myrod and stagnation and seems to remain.
Speaker 3: There for a very long time.
Speaker 2: There's obviously conflict in the Middle East that could easily escalate.
Speaker 3: To something much worse.
Speaker 2: And there's everything that's going on in China, and it's
Speaker 2: a big question whether the government will be able to
Speaker 2: stimulate the economy successfully or not, and what kind of
Speaker 2: geopolitical risks are associated with that around China. So I
Speaker 2: equities a price for perfection, and there's a lot of
Speaker 2: things that could happen between now in the next six months,
Speaker 2: say that could upset this I think great equilibrium that
Speaker 2: we've had of strong earnings growth going into a FED
Speaker 2: cutting cycle.
Speaker 1: Well, let's focus on the domestic economy and the US.
Speaker 1: I do want to talk to you about the election
Speaker 1: and the federal deficit and what could perhaps happen there.
Speaker 1: But just on the UIs economy, what are the biggest
Speaker 1: risks at faces right now going forward?
Speaker 2: Well, I think Madison, you actually hit the nail on
Speaker 2: the head there. Fiscal is probably the biggest risk. There
Speaker 2: was another thing I was concerned about, which was a
Speaker 2: very low savings rate, which we had at the beginning
Speaker 2: of the year. But the latest revision to the national
Speaker 2: economic data suggests that the savings rate was actually much
Speaker 2: higher than we thought. It's over five percent, which is
Speaker 2: a comfortable place to be. The consumer is not actually
Speaker 2: a stretch stretched as we thought, so we're likely looking
Speaker 2: at a continuing strong consumer. The fiscal deficit, on the
Speaker 2: other hand, federal government is stretched. No one has any
Speaker 2: plan to fix the situation, and I don't think any
Speaker 2: electoral outcome is likely to make it a lot better.
Speaker 3: We don't know who's going to be elected.
Speaker 1: It's anyone's geese the polls and Nick and Nick I
Speaker 1: typically don't like to talk about politics, but let's just
Speaker 1: focus on that deficit. You mentioned that no candidate has
Speaker 1: any desire to decrease it. Who could increase it more?
Speaker 1: And how inflationary could that be and perhaps have to
Speaker 1: lead to a federal reserve response.
Speaker 2: So I mean, let's take the things one by one.
Speaker 2: As you know, here in the United States, it's not
Speaker 2: the president. It is Congress that decides fiscal policy. So
Speaker 2: the composition of Congress will matter at least as much,
Speaker 2: if not more, as who is going to be the
Speaker 2: next president. If it were to end up in a
Speaker 2: situation where Donald Trump is president with a Republican Congress.
Speaker 2: I think that's a more adverse outcome for the fiscal deficit,
Speaker 2: just because the promises has given of significant tax cuts
Speaker 2: are only estimated to be far larger than the ones
Speaker 2: that Democrats have, and I think we would end up
Speaker 2: in a deficit situation. There's a lot of other things
Speaker 2: that Donald Trump had in mind for the economy that
Speaker 2: could affect the deficit, end the FED response, and I'm
Speaker 2: happy to go into those. But if, on the other hand,
Speaker 2: you end up with a divided government, meaning you know,
Speaker 2: kind of from one party in the White House and
Speaker 2: then a different party controls at least one chamber in Congress,
Speaker 2: then I think you'll end up with a more benign
Speaker 2: outlook for fiscal because whichever government is in opposition and
Speaker 2: controls the Chamber of Congress will generally want to restrain
Speaker 2: the president and keep a tighter fiscal outlook.
Speaker 1: I guess the ultimate question, given we've spoken about how
Speaker 1: perfect the US economy is right now, it is the
Speaker 1: center of global finance. We're just off Wall Street right now,
Speaker 1: does it really matter? Can't America ride that out? Won't
Speaker 1: the magnificent seven in this country save us?
Speaker 2: I think in general you know, when you look at
Speaker 2: it in a kind of decade perspective, American companies and
Speaker 2: the United States economy will be fine, and I think
Speaker 2: they will. United States, regardless of the political outcomes, will
Speaker 2: continue to dominate international innovation and the technological frontier.
Speaker 3: That's not in question.
Speaker 2: Where it becomes, you know, A little bit more problematic
Speaker 2: is for things like the treasurer's market.
Speaker 3: How much can the government borrow?
Speaker 2: I like to joke, you know, because of the exorbitant
Speaker 2: privilege of issuing the US dollar, the United States federal
Speaker 2: deficits a little bit like those fancy credit cards.
Speaker 3: They don't tell you what the credit limit is.
Speaker 2: There is a credit limit, but the only way to
Speaker 2: find out is by hitting it. And I think that's
Speaker 2: what has economists concerned, is that we might be getting
Speaker 2: closer to actually hitting the credit limit of the US
Speaker 2: federal deficit.
Speaker 1: But in the meantime, the US can probably continue to
Speaker 1: live beyond its mains.
Speaker 2: I think more than any other economy in the world,
Speaker 2: the US can lived beyond its means. That is a
Speaker 2: consequence of being the center of global finance and issuing
Speaker 2: the reserve currency. Now, none of these things are forever
Speaker 2: as history teaches us, so it's important to be cautious about,
Speaker 2: you know, how we treat the US dollar, what competition
Speaker 2: there is to the dollar system, and how America conducts
Speaker 2: its international financial policy with respect to that. So it's
Speaker 2: therefore now, but I would caution it's not a given forever.
Speaker 1: Thank you so much for your time, always good to
Speaker 1: chat and especially in your home too.
Speaker 3: Absolute pleasure. Thank you for visiting