WEBVTT - Bloomberg Wall Street Week - August 25th, 2023 0:00:00.240 --> 0:00:02.440 This is Bloomberg Wall Street Week. 0:00:02.480 --> 0:00:04.400 And we may not have an overall recession, we're having 0:00:04.400 --> 0:00:06.760 a rolling recession. To conye, roll looks pretty strongly. It 0:00:06.760 --> 0:00:09.000 is when it comes to jobs. The financial stories that 0:00:09.119 --> 0:00:12.640 shape our world. Three major regional bank failures send shockwaves 0:00:12.680 --> 0:00:14.880 through the banking system. We're all trying to figure out 0:00:14.880 --> 0:00:17.000 what to make of generative AI. 0:00:16.920 --> 0:00:19.320 Through the eyes of the most influential voices. 0:00:19.440 --> 0:00:22.400 Welcome down, Doctor Paul Krugman, Ryan moynihan, a Bank of America, 0:00:22.520 --> 0:00:25.279 deebro Lair of the Paulson Institute, well then Hubbard of 0:00:25.280 --> 0:00:26.280 the Columbia Business School. 0:00:26.280 --> 0:00:30.160 Bloomberg Wall Street Week with David Weston from Bloomberg Radio. 0:00:30.440 --> 0:00:33.440 A tale of two cities. As the bricks meet in 0:00:33.520 --> 0:00:37.320 Johannesburg and the central bankers and Jackson Hole, while race 0:00:37.520 --> 0:00:40.760 just keep going up all around the world. This is 0:00:40.760 --> 0:00:44.320 Wall Street Week. I'm David Weston. This week, I'm Sonny 0:00:44.320 --> 0:00:47.159 Bechelists of Rock Creek. On the bricks searching for a 0:00:47.240 --> 0:00:49.240 new engine for economic growth. 0:00:49.640 --> 0:00:53.120 These new countries that got added the accounts for very 0:00:53.200 --> 0:00:55.000 little in terms of economic clouds. 0:00:55.520 --> 0:00:58.560 Dan Trulo of Harvard on new limits on the banks. 0:00:58.880 --> 0:01:02.040 These banks really they are facing, I think a real 0:01:02.160 --> 0:01:05.160 challenge to their business model over the medium term. 0:01:05.400 --> 0:01:08.120 And Eric Canter of Molus on what all the new 0:01:08.200 --> 0:01:11.520 issuance is doing to yield on government bonds. 0:01:11.840 --> 0:01:15.480 At some point you will reach a mark in which 0:01:15.800 --> 0:01:18.560 you know investors say, well, how much more are you 0:01:18.600 --> 0:01:33.800 going to pay me to keep borrowing like this? 0:01:33.800 --> 0:01:36.000 This week Global Wall Street had to keep an eye 0:01:36.040 --> 0:01:39.800 on two very different events some ten thousand miles apart. 0:01:40.040 --> 0:01:43.840 In Johannesburg, the so called Bricks countries held their annual summit, 0:01:44.000 --> 0:01:48.000 seeking to reinject some economic growth through a range of initiatives. 0:01:48.560 --> 0:01:52.520 Are we need to fully leverage the role of the 0:01:52.560 --> 0:01:57.680 new development banks, push forward reform of the international financial 0:01:57.880 --> 0:02:01.840 and the monetary systems, and past the representation and voice 0:02:02.200 --> 0:02:03.480 of developing countries. 0:02:03.880 --> 0:02:06.640 And while the Bricks were searching for growth, Chair Powell 0:02:06.760 --> 0:02:09.760 led central bankers out to Jackson Hall, Wyoming in search 0:02:09.800 --> 0:02:12.720 of some clarity, maybe even steadiness, in the quest to 0:02:12.800 --> 0:02:16.320 keep growth going but still get inflation under control. 0:02:16.680 --> 0:02:19.880 We are prepared to raise rates further if appropriate, and 0:02:19.960 --> 0:02:23.440 intend to hold policy at a restrictive level until we 0:02:23.480 --> 0:02:27.840 are confident that inflation is moving sustainably down toward our objective. 0:02:28.600 --> 0:02:33.880 Regularities are no longer regular, and we have more irregularities 0:02:33.919 --> 0:02:39.040 than regularities. We cannot exclusively rely on inflation OUTLUK as 0:02:39.040 --> 0:02:40.240 determined by models. 0:02:40.400 --> 0:02:42.400 But there was also a lot going on in between 0:02:42.480 --> 0:02:45.880 Johannesburg and Jackson Hole, as reports came in midweek that 0:02:45.960 --> 0:02:49.720 mister Progosian's private plane had gone down northwest of Moscow 0:02:49.919 --> 0:02:52.600 and what just happened to be the two month anniversary 0:02:52.680 --> 0:02:56.200 of his mutiny against President put in Washington, the SEC 0:02:56.240 --> 0:02:59.000 came out with its new disclosure rules for hedge funds 0:02:59.000 --> 0:03:00.200 and private equity. 0:03:00.080 --> 0:03:03.959 Firms, increased fee disclosure for hedge funds and private equity firms. 0:03:04.000 --> 0:03:08.000 This is a seventeen trillion dollar industry and all across 0:03:08.000 --> 0:03:08.480 the country. 0:03:08.600 --> 0:03:11.280 People took a hard look at mortgage rates over seven 0:03:11.320 --> 0:03:14.560 point three percent and decided they could wait, as mortgage 0:03:14.600 --> 0:03:18.520 applications fell to their lowest since nineteen ninety five. On 0:03:18.560 --> 0:03:21.600 the other hand, owners of Nvidia didn't have to worry 0:03:21.720 --> 0:03:24.359 much about high mortgage payments as they saw the AI 0:03:24.440 --> 0:03:27.600 chip maker come out with yet another gangbuster set of 0:03:27.680 --> 0:03:30.960 numbers and predictions on just how high the sky might be. 0:03:31.440 --> 0:03:34.920 This was a historic guidance that we saw from the 0:03:35.000 --> 0:03:40.520 godfather of Ai, Jensten Nvidia. 0:03:39.440 --> 0:03:41.880 And although Tech gave up some of the Nvidia gains 0:03:41.880 --> 0:03:44.160 on Thursday, the Nasdaq by the end of the week 0:03:44.200 --> 0:03:46.880 was up a robust two point twenty six percent. The 0:03:46.960 --> 0:03:48.920 S and P five hundred didn't do quite as well, 0:03:49.000 --> 0:03:51.920 adding eight ten percent, ending the week at forty four 0:03:52.000 --> 0:03:54.200 or five. That's just over one hundred points above the 0:03:54.320 --> 0:03:56.920 median number our Bloomberg L's project for the end of 0:03:56.920 --> 0:03:59.360 the year, and the yield on the ten year stayed 0:03:59.480 --> 0:04:02.880 reasonably flat, adding just over two basis points, leaving it 0:04:02.920 --> 0:04:05.800 at four point two three percent. Take us through the 0:04:05.840 --> 0:04:08.280 news in the markets this week. We welcome now Scott Kronert, 0:04:08.320 --> 0:04:12.840 He's City US equity strategist, and Laurie Capacina, RBC Capital Markets, 0:04:12.880 --> 0:04:15.120 head of US equity strategy. Welcome to both of you. 0:04:15.200 --> 0:04:17.039 Great Ja you Lauria. Let me start with you first 0:04:17.040 --> 0:04:19.360 of all, what were the big stories in the markets 0:04:19.400 --> 0:04:20.720 this week from your point of view? 0:04:21.000 --> 0:04:22.920 So look, I think it was big tech earnings. I 0:04:23.040 --> 0:04:25.320 was out marketing seeing clients this week. I couldn't get 0:04:25.320 --> 0:04:27.880 out of a meeting without having a debate over a 0:04:27.880 --> 0:04:30.280 certain company and then also, I think jackson Hole was 0:04:30.320 --> 0:04:33.040 the other one, and I would say, look, with jackson Hole, 0:04:33.080 --> 0:04:35.159 I don't think there were any big surprises there, but 0:04:35.200 --> 0:04:36.960 I do think it was good to get that event 0:04:37.000 --> 0:04:37.560 out of the way. 0:04:37.760 --> 0:04:40.479 What about Jackson Hole from your perspective, Scott, did you 0:04:40.480 --> 0:04:42.760 hear anything that surprised you to anything that might change 0:04:42.800 --> 0:04:44.680 where the markets are headed? Well? 0:04:44.960 --> 0:04:47.440 I think what Sherman and Paul gave us was a 0:04:47.920 --> 0:04:50.680 continuation of an ongoing theme that he's going to stay 0:04:50.680 --> 0:04:53.720 the course on his focus on inflation and wants to 0:04:53.760 --> 0:04:57.279 see the path to two percent very clearly. In the meantime, 0:04:57.680 --> 0:04:59.880 I think the question that continues to come up with 0:05:00.080 --> 0:05:02.840 many clients and investors as so, how do I think 0:05:02.880 --> 0:05:06.000 about interest rates breaking through ten percent of the ten 0:05:06.040 --> 0:05:09.280 year and moving through four point two percent or higher? 0:05:09.640 --> 0:05:13.080 And so they're the discussion very quickly goes from Okay, 0:05:13.120 --> 0:05:16.640 we get it, fed funds probably higher for longer. How 0:05:16.680 --> 0:05:19.120 do I think about longer term interest rate trends and 0:05:19.160 --> 0:05:22.440 how does that affect the valuation paradigm on US equity skin. 0:05:22.520 --> 0:05:24.240 I think one of the things we've heard from Jaypowe 0:05:24.400 --> 0:05:26.960 on Friday was we're not sure where we're going, as 0:05:26.960 --> 0:05:29.640 they say, data dependent. It depends on how the numbers 0:05:29.680 --> 0:05:33.440 come in. So what do you advise clients. On the 0:05:33.480 --> 0:05:36.200 one hand, it's four point five percent yield on the 0:05:36.200 --> 0:05:38.480 ten year versus three point five percent. I mean, that's 0:05:38.560 --> 0:05:40.719 one percent, but it could make a real difference in 0:05:40.720 --> 0:05:41.640 the value of stocks. 0:05:41.760 --> 0:05:43.719 The easy answer for me is that we look for 0:05:43.800 --> 0:05:47.159 pullbacks to be more opportunistic getting long US equities going 0:05:47.200 --> 0:05:49.600 into a fairly robust target for the end of this 0:05:49.720 --> 0:05:52.680 year at forty six hundred and our midyear target for 0:05:52.720 --> 0:05:57.200 next year five thousand. So we're looking at any market 0:05:57.240 --> 0:06:01.920 pullback is a function of valuation compression around the rate 0:06:02.040 --> 0:06:06.040 discussion as ultimately a buying opportunity. As we think under 0:06:06.080 --> 0:06:08.840 the surface, the S and P five hundred is probably 0:06:08.960 --> 0:06:12.240 less connected to the aggregate US economy the most expect 0:06:12.600 --> 0:06:15.440 and in that regard, earning has become a more important driver. 0:06:15.520 --> 0:06:18.600 And there were table pounding bullish in terms of how 0:06:18.640 --> 0:06:22.240 corporate America is contending with the macro influences. 0:06:21.760 --> 0:06:24.239 Right now, Laurier, we have a rare opportunity here tonight 0:06:24.320 --> 0:06:26.880 because we have not one but two bloomberg Ols President 0:06:27.080 --> 0:06:29.640 you and Scott and he just mentioned he's at forty 0:06:29.680 --> 0:06:33.080 six hundred year end this year, you're at forty two 0:06:33.080 --> 0:06:35.720 to fifty, right and the forty three hundreds the median. 0:06:36.040 --> 0:06:38.360 Is there very much difference between forty six hundred and 0:06:38.480 --> 0:06:40.760 forty two to fifty in what might push you to 0:06:40.839 --> 0:06:41.599 the lower number. 0:06:42.040 --> 0:06:44.560 So we're basically at the median right now. And that's 0:06:44.600 --> 0:06:47.320 also basically the average of six different models that we run, 0:06:47.360 --> 0:06:49.400 and our most bullish model gets us up to forty 0:06:49.400 --> 0:06:51.200 eight hundred on the S and P. That's looking at 0:06:51.240 --> 0:06:54.039 where we think valuations could be and our earnings forecast. 0:06:54.320 --> 0:06:56.320 But the real drag on our model, I would say, 0:06:56.360 --> 0:06:58.919 is actually our cross asset indicators, which look at stocks 0:06:58.920 --> 0:07:01.560 relative to bonds. Now, that was a reason to be 0:07:01.600 --> 0:07:03.440 bearish at the beginning of the year, but we did 0:07:03.440 --> 0:07:05.719 see some improvement on those models in the second quarter. 0:07:05.800 --> 0:07:07.880 What we've seen recently with this move up in bond 0:07:07.960 --> 0:07:11.360 yields is that those models are rapidly getting more or 0:07:11.440 --> 0:07:13.920 less favorable for equities, more of a pressure point, and 0:07:13.960 --> 0:07:16.680 we are actually starting to see money flows come out 0:07:16.680 --> 0:07:18.040 of the US equity. 0:07:17.640 --> 0:07:18.280 Market as well. 0:07:18.280 --> 0:07:20.440 That was just my question because you've always, Laurie been 0:07:20.480 --> 0:07:22.400 telling us you know, we really need to be in equities. 0:07:22.440 --> 0:07:25.400 People are underrating equities, but are you starting to see flows? 0:07:25.480 --> 0:07:28.200 It is substantial right now as the bonds become more 0:07:28.200 --> 0:07:29.240 attractive with those yields. 0:07:29.280 --> 0:07:32.480 So what's interesting is that to start the year everyone said, okay, 0:07:32.520 --> 0:07:34.560 bonds are more attractive than equities, and we did see 0:07:34.560 --> 0:07:36.920 money flow go into bonds, and then we actually saw 0:07:36.920 --> 0:07:39.760 in the second quarter money come back into US equities 0:07:39.800 --> 0:07:41.760 as it was being pulled out of Europe. So there 0:07:41.800 --> 0:07:44.800 was an international dynamic that helped the US equity market. 0:07:45.280 --> 0:07:47.480 But what we are seeing now is that we're getting 0:07:47.520 --> 0:07:49.400 to a point in the year where these flow trends 0:07:49.440 --> 0:07:51.680 tend to fade a bit. You're seeing those European equity 0:07:51.680 --> 0:07:54.720 flows stabilize and that money is actually coming specifically out 0:07:54.720 --> 0:07:56.880 of the growth part of the market, and that's pulling 0:07:56.920 --> 0:07:58.520 the overall US equity flows down. 0:07:58.640 --> 0:08:01.600 Scott, one of the things that make people into equities 0:08:01.760 --> 0:08:03.880 is earnings. Where are you on earnings right now? What 0:08:03.880 --> 0:08:05.320 do you think about the seasons we've just been through, 0:08:05.400 --> 0:08:07.000 and what are you looking at in twenty twenty four. 0:08:07.240 --> 0:08:09.840 So the change with Q two earnings was that in 0:08:10.520 --> 0:08:13.520 comparison to Q one we saw earnings for the four 0:08:13.600 --> 0:08:16.200 yer move higher posts Q one, but you didn't see 0:08:16.240 --> 0:08:19.320 too much in the out quarter side of the equation. 0:08:19.800 --> 0:08:22.000 With Q two, we began to see an upper revision 0:08:22.040 --> 0:08:24.480 bias to Q three and Q four. We think at 0:08:24.520 --> 0:08:27.800 this point the twenty three earnings and around two twenty 0:08:27.840 --> 0:08:29.480 are more or less dialed in. 0:08:29.800 --> 0:08:30.920 But where we think. 0:08:30.800 --> 0:08:33.880 This is headed is that as we work through either 0:08:34.040 --> 0:08:38.000 economic slowing or mild recession, the path is still for 0:08:38.120 --> 0:08:40.960 higher earnings as we move into twenty twenty four, and 0:08:41.000 --> 0:08:42.959 we're on the more bullish side of the outlook for 0:08:43.000 --> 0:08:46.400 twenty twenty four looking for roughly two forty five of earnings. 0:08:46.600 --> 0:08:49.880 There's some sector differences in here that influence the way 0:08:49.960 --> 0:08:52.680 this year versus next year play out, and so we're 0:08:52.679 --> 0:08:57.120 looking for let's call it less disperse sector setup as 0:08:57.160 --> 0:09:01.079 an underlying driver of an earnings acceleration into twenty twenty four. 0:09:01.200 --> 0:09:03.120 Lord, do you see some sector differences as you look 0:09:03.120 --> 0:09:03.960 into twenty twenty four. 0:09:04.440 --> 0:09:06.440 So what we've seen for next year is that if 0:09:06.480 --> 0:09:09.320 you look at the change in anticipating growth rates on earnings, 0:09:09.320 --> 0:09:11.640 I believe it's healthcare and energy are the two that 0:09:11.679 --> 0:09:15.080 have actually seen some upward revisions recently to that year specifically, 0:09:15.120 --> 0:09:16.920 and those have actually been two of the better performing 0:09:16.960 --> 0:09:19.800 sectors in August in the US equity market for the 0:09:19.880 --> 0:09:23.280 SMP specifically, so you are seeing investors pay attention to 0:09:23.360 --> 0:09:25.640 that kind of issue. I think the other thing though, 0:09:25.679 --> 0:09:27.199 to keep in the back of your mind on twenty 0:09:27.240 --> 0:09:30.600 twenty four earnings is that inflation is anticipated to moderate. 0:09:30.800 --> 0:09:33.200 I think this will affect energy and healthcare less. But 0:09:33.280 --> 0:09:35.800 as that happens, our model actually shows it's a drag 0:09:35.840 --> 0:09:37.720 on revenue. So we think there could be some earnings 0:09:37.720 --> 0:09:39.319 pressures people need to get prepared for. 0:09:39.480 --> 0:09:41.880 Inflation may moderate, but we've heard Scott say there maybe 0:09:41.880 --> 0:09:44.400 a slowdown or even a recession in twenty twenty four. 0:09:44.440 --> 0:09:47.440 That's still a possibility. Did you think earnings will hold 0:09:47.520 --> 0:09:48.480 up in that situation. 0:09:49.080 --> 0:09:50.880 I think there are a lot of cross currents. But 0:09:51.000 --> 0:09:54.199 we have found that revenues in SMP earnings are really 0:09:54.280 --> 0:09:57.400 dictated by two things, inflation and GDP trends. So I 0:09:57.480 --> 0:09:59.240 do think it would be tough if we do see 0:09:59.640 --> 0:10:01.960 sort of the session just pushed into twenty twenty four. 0:10:02.000 --> 0:10:03.960 I think that ends up being another challenge to earnings. 0:10:03.960 --> 0:10:05.280 It's hard to get around. 0:10:05.120 --> 0:10:06.960 Scott, how much attention do you pay to the GDP, 0:10:07.000 --> 0:10:09.439 because you know, though GP numbers coming in, some of 0:10:09.480 --> 0:10:12.760 the numbers are really extraordinary for five plus percent at 0:10:12.760 --> 0:10:14.800 this point, do you believe those numbers? And how much 0:10:14.800 --> 0:10:16.080 does that affect your advice? 0:10:16.200 --> 0:10:19.120 I think that the correlation of earnings to GDP is 0:10:19.160 --> 0:10:21.960 certainly high and an impoortant element. I think we have 0:10:22.000 --> 0:10:25.480 to look at correlation alongside leverage or beta to GDP, 0:10:26.280 --> 0:10:28.880 and there I'd be a little bit differentiated. In terms 0:10:28.880 --> 0:10:32.040 of the way we break the SMP down, it's essentially 0:10:32.080 --> 0:10:35.880 in the three clusters, growth, cyclicals, and defensives. Our growth 0:10:35.880 --> 0:10:39.800 cluster is roughly forty percent of the SMP, so almost 0:10:39.800 --> 0:10:43.600 by definition it should be less economic sensitive. Defensives we 0:10:43.640 --> 0:10:46.600 know are defensive for a reason, they're less economic sensitive. 0:10:46.880 --> 0:10:48.439 So that leaves your thirty. 0:10:48.200 --> 0:10:50.920 Percent of the market that we characterize as cyclicals that 0:10:51.080 --> 0:10:53.640 ought to be more exposed and leveraged to GDP. 0:10:53.880 --> 0:10:56.480 Okay, Laur Kalacina and Scott Krohnitt will be staying with 0:10:56.600 --> 0:10:59.120 us as we turn to new paradigms for the markets 0:10:59.200 --> 0:11:01.120 in the wake of the Great Financial Crisis, and by 0:11:01.160 --> 0:11:04.320 the way, that pandemic. That's next on Wall Street Week 0:11:04.559 --> 0:11:05.319 on Bloomberg. 0:11:07.920 --> 0:11:12.160 This is Bloomberg Wall Street Week with David Weston from 0:11:12.280 --> 0:11:15.240 Bloomberg Radio. 0:11:20.080 --> 0:11:22.800 This is Wall Street. I'm David Weston. Central bankers gathered 0:11:22.800 --> 0:11:25.280 in Jackson Hole this week to take a broader and 0:11:25.440 --> 0:11:28.200 longer term look at the economy and their approaches to 0:11:28.240 --> 0:11:31.640 monetary policy. Which rains is the question whether overall we're 0:11:31.640 --> 0:11:34.439 facing something of a paradigm shift after the traumas of 0:11:34.480 --> 0:11:36.960 the Great Financial Crisis and then the pandemic. It's got 0:11:37.000 --> 0:11:40.080 cornative city and Lori Calvacina of RBC Capital Markets have 0:11:40.160 --> 0:11:42.360 stayed with us to give us the markets perspective on 0:11:42.440 --> 0:11:44.200 where we may be headed. So Scott, let me start 0:11:44.200 --> 0:11:47.120 with you on this paradigm shift. Overturn used term, but 0:11:47.240 --> 0:11:50.200 it may well apply here. We've had the paradigm since 0:11:50.200 --> 0:11:52.120 the Great Financial Crisis and then we had to respond 0:11:52.120 --> 0:11:54.320 to the pandemic. Where are we headed next? 0:11:54.679 --> 0:11:56.920 Well, I want to focus on two elements of this, David, 0:11:56.960 --> 0:11:59.280 So I think first is regarding interest rates, which is 0:11:59.360 --> 0:12:01.440 continues to be elephant in the room, and we've talked 0:12:01.480 --> 0:12:04.120 about this in the context of valuations. But what we 0:12:04.240 --> 0:12:06.560 have to remember is that, Yes, we've been in a 0:12:06.559 --> 0:12:10.400 certain interest rate regime in the post GFC timeframe, but 0:12:10.440 --> 0:12:13.200 when you go back to look historically, it's fascinating the 0:12:13.240 --> 0:12:16.800 correlation between nominal and ten yure yields and SMP performance 0:12:16.840 --> 0:12:20.360 has varied by decade, going back to the sixties. So 0:12:20.400 --> 0:12:22.280 we do have to be all eyes open that as 0:12:22.280 --> 0:12:25.360 we move forward from here, higher for longer rates may 0:12:25.400 --> 0:12:27.960 be part of the investment landscape. And that's just an 0:12:28.000 --> 0:12:30.600 important element to keep a focus on. Is we look 0:12:30.880 --> 0:12:34.480 for the impact of rates on equity valuations. Now, the 0:12:34.520 --> 0:12:37.000 offset of that is growth drivers, and we do have 0:12:37.520 --> 0:12:39.480 a new sheriff in town, if you will, with AI. 0:12:39.920 --> 0:12:44.199 Over the past decade, we've had focus on areas such 0:12:44.240 --> 0:12:48.400 as cloud computing as a driver of productivity. Going forward 0:12:48.679 --> 0:12:50.840 enter AI. We definitely think there are going to be 0:12:50.840 --> 0:12:53.440 companies within the S and P five hundred that have 0:12:53.520 --> 0:12:56.719 a very real revenue and earnings benefit from AI. But 0:12:56.800 --> 0:12:59.800 more broadly and perhaps more important is under the surface. 0:13:00.240 --> 0:13:03.200 We think the productivity enhancement that can come to the 0:13:03.280 --> 0:13:06.960 broader industry economy is really fascinating to us. It has 0:13:07.040 --> 0:13:11.240 us structurally overweight industrials and it has us very focused 0:13:11.280 --> 0:13:14.800 on this notion that as corporate America is better able 0:13:14.840 --> 0:13:18.840 to real time manage their business models courtesy of technology, 0:13:19.120 --> 0:13:21.959 you may implicitly lower the economic sense at a bias 0:13:22.000 --> 0:13:23.240 to the underlying index. 0:13:23.440 --> 0:13:25.760 So Scott and Laura, I must say you have something 0:13:25.760 --> 0:13:28.120 of an ally here in Larry Summers, the former Treasury 0:13:28.120 --> 0:13:30.120 secretary wh's a special contributor here. I talked to him 0:13:30.120 --> 0:13:32.080 earlier today and one of the things he emphasized was 0:13:32.080 --> 0:13:35.040 possible a paradigm shift in the Fed fund rates and 0:13:35.080 --> 0:13:36.520 exactly what's going on with the interest rates. This is 0:13:36.559 --> 0:13:37.320 part we had to say. 0:13:38.280 --> 0:13:41.880 You may see the Fed funds rate have to go 0:13:42.080 --> 0:13:45.920 up once or even more than thatch over the next 0:13:46.000 --> 0:13:52.440 few few months. I think that there is an underappreciation 0:13:53.040 --> 0:13:59.680 in general of the fact that substantially enlarged government budget 0:13:59.720 --> 0:14:07.960 deaths means substantially more absorption of saving, means substantially more demand, 0:14:08.679 --> 0:14:12.080 and all of that means that the neutral interest rate 0:14:12.640 --> 0:14:17.280 is increased and is increase now and in the future. 0:14:17.440 --> 0:14:19.440 So Laurie, let me turn to you. To what extent 0:14:19.520 --> 0:14:22.480 do you agree with Larry, and if so, what does 0:14:22.520 --> 0:14:23.960 it mean for your clients? 0:14:24.360 --> 0:14:26.000 So I would say, on you know, the issue of 0:14:26.000 --> 0:14:27.960 the neutral rate. One of the things our Rate Strategies 0:14:27.960 --> 0:14:30.000 pointed out today that was that powising to kind of 0:14:30.000 --> 0:14:32.200 punt on that issue and say we don't really know 0:14:32.240 --> 0:14:34.480 what it is and kind of squirm out of it 0:14:34.520 --> 0:14:37.040 a little bit. I have some sympathy for that, but 0:14:37.160 --> 0:14:39.240 I will say, as I talk to investors, I'm not 0:14:39.320 --> 0:14:42.800 quite so sure. I think this notion is completely unappreciated. 0:14:43.160 --> 0:14:45.400 I talk to mostly equity folks, and I think they 0:14:45.440 --> 0:14:47.480 are very much of the opinion that we do have 0:14:47.560 --> 0:14:50.800 to brace ourselves for higher interest rates, you know, not 0:14:50.880 --> 0:14:54.360 a FED sitting at zero essentially propping everything up with 0:14:54.400 --> 0:14:57.720 the balance sheet, and also associated with that, frankly, they're 0:14:57.720 --> 0:14:59.880 looking for, you know, a higher run rate on inflation. 0:15:00.080 --> 0:15:03.320 So I was also struck today by chairmpin Powell's comments 0:15:03.640 --> 0:15:05.720 of really, you know, kind of reinforcing the idea of 0:15:05.760 --> 0:15:07.680 the two percent target, because frankly, a lot of the 0:15:07.720 --> 0:15:09.680 equity folks I talk to think maybe it should be 0:15:09.680 --> 0:15:10.360 a little bit higher. 0:15:10.440 --> 0:15:12.280 In a word, is AI going to bail us out? 0:15:12.320 --> 0:15:13.560 Scott thinks it may help us. 0:15:14.040 --> 0:15:16.480 Look, I think that AI is a positive driver. I 0:15:16.560 --> 0:15:18.400 agree with what a lot of what he said I 0:15:18.480 --> 0:15:22.080 view it as another productivity enhancing tool, not necessarily something 0:15:22.120 --> 0:15:24.520 that's going to completely change things, but I do think, 0:15:24.760 --> 0:15:28.160 you know, it's an important component of the idea that 0:15:28.240 --> 0:15:29.840 we do need to get used to a new world, 0:15:29.840 --> 0:15:34.520 and whether that's more technological innovation or reinvigorating the old economy. 0:15:34.560 --> 0:15:37.880 The reindustrialization theme, I think is another paradigm shift we're 0:15:37.880 --> 0:15:40.800 going through, really reversing globalization. I think it's all part 0:15:40.840 --> 0:15:41.640 of the same ball of wax. 0:15:41.720 --> 0:15:43.720 And there's the question when it comes when we get 0:15:43.720 --> 0:15:46.800 that productivity gain. Many thanks to Lori Calvasena of RBC 0:15:46.920 --> 0:15:51.280 Capital Markets and Scott Kroner of City. Higher rates for 0:15:51.440 --> 0:15:54.000 longer seems to be the order of the day. But 0:15:54.160 --> 0:15:56.840 how much higher and for how much longer? And what 0:15:56.920 --> 0:15:59.440 will these higher rates mean for things like deal making, 0:15:59.480 --> 0:16:01.960 which was all already struggling to come back. For some 0:16:02.000 --> 0:16:05.400 answers to these questions. Welcome now back Eric Canter. He's 0:16:05.400 --> 0:16:08.600 a vice chairman at Molison Company. Mister Canter earlier served 0:16:08.600 --> 0:16:11.560 from Virginia in the US Congress, including as House Majority 0:16:11.600 --> 0:16:13.240 of Leaders. So Eric, thank you so much for being 0:16:13.280 --> 0:16:14.600 a Wall Street We really appreciate it. 0:16:14.680 --> 0:16:15.840 David's a pleasure to be here. 0:16:15.920 --> 0:16:19.120 So now you're on Wall Street having been back down 0:16:19.320 --> 0:16:21.160 on the Capitol, give us a sense of where the 0:16:21.240 --> 0:16:22.520 rates are and where they're headed. 0:16:23.040 --> 0:16:26.880 Well, I mean, listen, I think many would say that 0:16:26.960 --> 0:16:30.400 the days of free money are over and that we 0:16:30.600 --> 0:16:33.120 are no longer going to see sort of the benefit 0:16:33.200 --> 0:16:35.680 of that and perhaps be paying the price for that. 0:16:36.080 --> 0:16:38.880 But there's no question that now we are seeing real 0:16:38.920 --> 0:16:43.440 interest rights now exists, and the cost for borrowing has 0:16:43.480 --> 0:16:47.160 gone up. And you know, from a deal making perspective, 0:16:47.200 --> 0:16:50.560 I think what we would like to see from Molas's 0:16:50.600 --> 0:16:53.520 perspective is a little bit more certainty. You know, you know, 0:16:53.640 --> 0:16:56.080 people projectble. Is there going to be a soft landing, 0:16:56.320 --> 0:16:58.760 is there going to be a recession? I mean, from 0:16:58.800 --> 0:17:02.200 our standpoint, it's about the Fed reaching a point where 0:17:02.520 --> 0:17:06.320 you can gain some certainty with the rate hikes. 0:17:06.359 --> 0:17:08.320 And the thing keep saying their data dependent depends on 0:17:08.359 --> 0:17:10.639 what the data are. It comes in what they're going 0:17:10.720 --> 0:17:14.159 to do. One point of data that seems not to 0:17:14.200 --> 0:17:16.640 be up for debate is how much money the US 0:17:16.720 --> 0:17:19.280 governments have to borrow the issuance of treasuries, because that 0:17:19.400 --> 0:17:21.320 certainly is a factor on what happens to the rates. 0:17:21.440 --> 0:17:23.240 The more we have to issue, the more interest you 0:17:23.240 --> 0:17:23.760 have to pay. 0:17:24.160 --> 0:17:26.320 Well, there's no question, and as we know, we went 0:17:26.520 --> 0:17:28.960 right up the country went right up to the edge 0:17:29.000 --> 0:17:32.000 in terms of the debt ceiling, which caused the coffers 0:17:32.040 --> 0:17:35.560 to really empty out, which has now caused the federal 0:17:36.280 --> 0:17:40.200 government to have to incur an incredible amount over twenty 0:17:40.240 --> 0:17:44.119 dollars of issuances. I think since that sort of standoff 0:17:44.160 --> 0:17:46.840 in Washington, So you know, look, David, I think that 0:17:47.000 --> 0:17:49.719 certainly you could look at some of the auctions that 0:17:49.800 --> 0:17:53.200 have taken place. Some haven't gone as well as expected, 0:17:53.240 --> 0:17:55.720 but most by far have gone very well. 0:17:55.800 --> 0:17:56.400 I don't think the. 0:17:56.359 --> 0:17:59.520 Federal government has a problem in borrowing right now, but 0:17:59.600 --> 0:18:03.240 at some point you will reach a mark in which, 0:18:03.520 --> 0:18:07.119 you know, investors say, well, you know, is how much 0:18:07.240 --> 0:18:09.720 more are you going to pay me to keep barring 0:18:09.840 --> 0:18:11.760 like this? And that's the point you don't want to 0:18:11.760 --> 0:18:15.880 get to. And I think from a deal making perspective, again, 0:18:15.960 --> 0:18:18.239 it gets back to the point of certainty. When are 0:18:18.240 --> 0:18:21.959 we going to see the ability for this country to 0:18:21.960 --> 0:18:26.000 have policies in place to grow at a quicker rate 0:18:26.160 --> 0:18:29.040 than the debt is growing. And that's ultimately the goal. 0:18:29.280 --> 0:18:31.480 Right now, we're seeing projections, for example, coming out of 0:18:31.520 --> 0:18:34.159 the Congressional Budget Office suggesting that because of just the 0:18:34.200 --> 0:18:36.879 increase we've already seen in the rates, our interest payments 0:18:36.920 --> 0:18:38.439 are going to be much much higher. It's going to 0:18:38.440 --> 0:18:40.199 add a fair amount to that debt that we have 0:18:40.280 --> 0:18:42.840 to service at some point starts to crowd out other 0:18:43.000 --> 0:18:44.520 things that we will be doing with the money. 0:18:44.760 --> 0:18:49.480 So I think this is the accurate statistics that the 0:18:49.680 --> 0:18:52.560 interest cost has gone up over thirty five percent over 0:18:52.560 --> 0:18:55.720 the past year. We are going to reach a point, 0:18:55.720 --> 0:18:59.200 maybe in fiscal year twenty four or twenty five, that 0:18:59.240 --> 0:19:02.280 the federal government and it's interest bill will be as 0:19:02.400 --> 0:19:05.680 much as what the federal government funds the Pentagon with. 0:19:05.840 --> 0:19:09.199 I mean, that's a really dawning thought, and so we 0:19:09.280 --> 0:19:11.720