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Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News.

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Speaker 2: Hello and welcome to another episode of the aud Thoughts podcast.

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Speaker 2: I'm Tracy Alloway and I'm Joe.

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Speaker 3: Isn't thal Joe.

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Speaker 2: We always start these the same with someone saying, it's

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Speaker 2: that time of year, and.

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Speaker 4: It's the most wonderful time of the year.

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Speaker 2: That's right, never changed.

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Speaker 4: Forecast season, it's.

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Speaker 2: The outlook season. It is the moment when every investment

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Speaker 2: bank on Wall Street releases they're forecasts for next year.

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Speaker 4: Yeah, it is a great time, you know.

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Speaker 3: We make New Year's resolutions.

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Speaker 4: The time of year, we go back, we make our

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Speaker 4: list of top ten things that happened, predictions, as we're

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Speaker 4: supposed to. News gets a little quiet often around the holidays,

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Speaker 4: so we make up for it by just looking back

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Speaker 4: and looking forward.

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Speaker 2: And then a year later we completely forget what everyone

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Speaker 2: says about the current year and we just move on

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Speaker 2: and do the next year. That's right, always forward looking.

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Speaker 2: Although I do think, you know, twenty twenty six shaping

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Speaker 2: up to be an interesting year for a variety of reasons.

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Speaker 2: We just had a CPI number that came out surprisingly

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Speaker 2: softer than a lot of people expected. Some people say,

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Speaker 2: unrealistically softer with zero percent shelter costs increase, So that

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Speaker 2: was interesting. We're going to have a new FED chairman. Yeah,

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Speaker 2: there's still a question mark over the impact of tariffs,

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Speaker 2: whether we're waiting to see those show up, and what's

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Speaker 2: going to happen with unemployment as well, that's been ticking up.

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Speaker 4: And then it's been this really incredible year obviously in

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Speaker 4: the stock market. The US stock market just continues year

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Speaker 4: after year, with a few exceptions here and there, but

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Speaker 4: not many putting up massive numbers. And so the question

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Speaker 4: is like how long is this realistic, especially given you know,

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Speaker 4: all the concerns about concentration and a handful of names,

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Speaker 4: some of which haven't really been doing so well lately,

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Speaker 4: and so so many on both the real economy and

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Speaker 4: the stock mark.

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Speaker 2: Yeah, there's definitely been some dispersion creeping into some of

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Speaker 2: the big AI names or the tech names. All right, well,

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Speaker 2: I'm happy to say we do, in fact have the

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Speaker 2: perfect guests plural. We've got two. So we're going to

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Speaker 2: be speaking with Jan Hatzias. He's the chief economist and

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Speaker 2: head of research at Goldman Sachs. He's been on the

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Speaker 2: show a number of times before and we like talking

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Speaker 2: to him at least once a year. And Ben Snyder,

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Speaker 2: he is the chief US equity strategist, replacing David Costen.

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Speaker 2: So thank you both for coming on all thoughts.

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Speaker 3: Thanks so much for having us.

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Speaker 5: Great to be here.

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Speaker 2: Is research outlook time? Is that actually a quiet time

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Speaker 2: for you guys?

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Speaker 6: It's not a quiet time normally. We actually do it

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Speaker 6: about six weeks earlier. Yeah, because actually November tends to

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Speaker 6: be a little bit better than December. But because of

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Speaker 6: the shutdown and the dearth of data, we decided to

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Speaker 6: push it back. It's completely under all control when we

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Speaker 6: do it, and why do it at a time when

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Speaker 6: you actually have much less information normal? So we pushed

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Speaker 6: out a number of reports yesterday, including the global economic

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Speaker 6: and market's outlook.

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Speaker 4: Can you talk to two of you maybe again? So

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Speaker 4: obviously different roles, but on the same team. And obviously

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Speaker 4: the stock market US secrety market is different from the economy,

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Speaker 4: and you can have years where the economies find stocks

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Speaker 4: are bad and vice versa. All different permutations and combinations.

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Speaker 4: But how do you think about being in alignment cross

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Speaker 4: team and so that roughly you're sort of working under

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Speaker 4: a similar set of assumption.

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Speaker 6: Yeah, I can talk about that, and not just with

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Speaker 6: respect to the US or global economic outlook versus stock

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Speaker 6: market outlook. But of course there's currencies, there's em economies,

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Speaker 6: there's commodities. Certainly on the macro side, I would say

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Speaker 6: we're on the coordinated side of the spectrum. Nobody is

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Speaker 6: at one extreme or the other extreme. You can't have

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Speaker 6: people that just work alongside one another without ever talking

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Speaker 6: to one another. But you also shouldn't have just a

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Speaker 6: machine where everything is exactly aligned and there's zero room

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Speaker 6: for individual initiative. So we're towards the coordinator side for sure.

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Speaker 4: Well, you mentioned yesterday a good time to note to

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Speaker 4: listeners we are recording this December nineteenth, twenty twenty five. Ben,

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Speaker 4: how do you think about sort of working with aligning

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Speaker 4: your views of where markets are going or what the

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Speaker 4: meaning of the rally has with the sort of with

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Speaker 4: the macro thinking.

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Speaker 5: There are a number of frameworks to think about the

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Speaker 5: equity market, but a pretty common one and one we

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Speaker 5: rely on a lot, is to think of the market

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Speaker 5: like a stock, as a discounted stream of future cash flows.

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Speaker 5: And from that perspective, the most important driver of stocks

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Speaker 5: is that stream of cash flows is earnings, and if

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Speaker 5: you break those apart, the most important driver of those

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Speaker 5: cash flows is usually the US economy. So we rely

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Speaker 5: very heavily on Yon's forecasts.

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Speaker 2: So in terms of Yan's forecast, I noticed your forecasting

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Speaker 2: strong growth as in GDP, but also rising unemployed. How

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Speaker 2: do you square those two things.

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Speaker 6: We have flat unemployment at four and a half percent,

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Speaker 6: but it's not going down as you might think when

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Speaker 6: you're printing let's say two point six percent for real

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Speaker 6: GDP in two thousand and twenty six. And a small

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Speaker 6: part of the answer is that that two point six

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Speaker 6: probably overstates the underlying trend a bit because we had

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Speaker 6: the shutdown that the pressed Q four it's going to

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Speaker 6: add to Q one. But the more important part of

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Speaker 6: the answer is accelerating productivity growth, and we've seen that

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Speaker 6: over the last five years. The five years since the

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Speaker 6: pandemic have shown about two percent underlying trend productivity growth.

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Speaker 6: The prior cycle was at about one and a half percent.

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Speaker 6: And I think there's reason to believe that that acceleration

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Speaker 6: is still ongoing because it probably doesn't have a lot

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Speaker 6: of AI in it. We expect more of a boost

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Speaker 6: from AI going going forward in the next five years,

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Speaker 6: then in the last five years, and I think that's

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Speaker 6: got important implications for the relationship between GDP and unemployment.

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Speaker 4: So obviously, like the distribution of growth matters. It seems

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Speaker 4: to particularly matter when we're talking about the stock market,

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Speaker 4: because you can have sectors that are like very quiet,

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Speaker 4: but then you have these gigantic companies that make a

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Speaker 4: ton of money and capture a lot of the growth

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Speaker 4: that their stock's do incredibly well, maybe it would be

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Speaker 4: helpful even before we get to the twenty six outlook

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Speaker 4: for the economy, ben like what happened in twenty twenty five,

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Speaker 4: What were the underlying conditions that allowed for such like

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Speaker 4: another monster year, especially for the Nasdaq and a lot

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Speaker 4: of big tech names.

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Speaker 5: So to bring it back to earning, Yeah, one thing

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Speaker 5: that happened was really strong earnings growth. And I think

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Speaker 5: among all the discussions of bubbles, what's underappreciated is just

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Speaker 5: how strong corporate earnings growth has been.

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Speaker 3: Yeah.

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Speaker 5: Just wrapped up the third quarter season a few weeks ago,

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Speaker 5: and S and P five hundred companies in aggregate reported

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Speaker 5: earnings growth of twelve percent. Even if we strip out

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Speaker 5: the megacaps, the median S and P stock reported earning's

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Speaker 5: growth of about ten percent. That's very solid.

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Speaker 4: This seems to be like an underappreciated point, which is that, look,

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Speaker 4: the AI driven market, the tech heavy market, it is

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Speaker 4: not just that, is it.

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Speaker 5: We'll take an extension for this. We spend a lot

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Speaker 5: of time, understandably talking about the largest stocks in the market.

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Speaker 5: The top ten stocks are over forty percent of market cap.

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Speaker 5: We should spend a lot of time talking about them.

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Speaker 3: But if you look at the S.

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Speaker 5: And P four hundred and ninety or four hundred ninety three,

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Speaker 5: that market or that group of stocks has returned about

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Speaker 5: fifteen percent this year. They were turned about fifteen percent

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Speaker 5: last year. They were turned about fifteen percent the year prior.

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Speaker 5: And so I understand why we're talking about the large stocks,

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Speaker 5: but really the broad US equity market has performed quite well.

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Speaker 3: Well.

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Speaker 2: How do you account for I guess the weakness that

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Speaker 2: we've seen in some of the mega tech stocks in

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Speaker 2: recent weeks. What's going on there?

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Speaker 5: For three years we've been obsessed with AI as a market,

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Speaker 5: and for three years, really the story has been increased capex,

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Speaker 5: extraordinarily growth in AI investment spending. And although we're discussing

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Speaker 5: a lot the eventual productivity benefits. As Yon mentioned, really

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Speaker 5: the trade in the equity market has been the companies

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Speaker 5: with earnings that are benefiting from those capex dollars. And

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Speaker 5: what's happened this year, especially in the last several months,

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Speaker 5: is it's become increasingly clear that A probably that growth

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Speaker 5: will decelerate next year, and b to continue that growth,

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Speaker 5: it's going to require more debt, and both of those

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Speaker 5: factors have made investors understandably uncomfortable.

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Speaker 3: Yeah.

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Speaker 4: One of the sort of the viral charts of the

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Speaker 4: year various estimates of like how much the AI build

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Speaker 4: out specifically is a driver of US economic growth? And

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Speaker 4: twenty five and beyond, like how much you know, when

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Speaker 4: you look at the GDP in twenty twenty five, how

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Speaker 4: much of the growth can you attribute to what benj

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Speaker 4: just talked about.

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Speaker 3: Actually pretty close to zero.

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Speaker 4: Really, this is because very different.

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Speaker 6: This is a zero I love for two reasons. Number one,

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Speaker 6: the goods that are being invested in in the AI

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Speaker 6: sector are largely imported, so you can look at the

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Speaker 6: contribution of investment spending to GDP growth, But if you

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Speaker 6: don't net that out against the imports, then you're going

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Speaker 6: to get the wrong answer.

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Speaker 3: That's one reason.

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Speaker 6: Second reason is that semiconductors are generally treated as intermediate inputs,

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Speaker 6: not as investment, so they don't actually show up in

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Speaker 6: the investment numbers. And so when we look at the

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Speaker 6: impact of AI investment on measured GDP growth on the

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Speaker 6: numbers that are actually being printed, we're getting only about

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Speaker 6: twenty basis points of contribution over the last three or

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Speaker 6: four years, and pretty close.

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Speaker 3: To zero over the last year.

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Speaker 4: So it struck to me is such an important point

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Speaker 4: because you know, you have other people estimating how fifty

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Speaker 4: percent of growth this year is related to the AI

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Speaker 4: build up? Are you just always like banging your head

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Speaker 4: against the wall because you must see these headlines every

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Speaker 4: day like the rest of us.

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Speaker 6: I do a bit because oftentimes it's just based on

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Speaker 6: looking at some portion of investment spending. Sometimes there are

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Speaker 6: also other things included in those calculations that aren't necessarily

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Speaker 6: AI related. But the big point is that you really

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Speaker 6: need to look at the imports as well.

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Speaker 2: Ben I should just ask before we go any further,

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Speaker 2: what actually is your twenty twenty six target for the

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Speaker 2: S and P five hundred, Because we haven't seen the

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Speaker 2: official outlook yet.

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Speaker 5: We've published seventy six hundred seventy six ORed.

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Speaker 2: Okay, so one thing I did want to ask this

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Speaker 2: was in Yan's Economic outlook. But you talk about potentially

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Speaker 2: credit underperforming, which seems a little bit strange if interest

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Speaker 2: rates are going lower and you know, equities are doing

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Speaker 2: pretty good. What's going on there?

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Speaker 6: I mean, it's mainly really that the valuations are very high.

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Speaker 6: The credit fundamentals we think are still pretty good, but

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Speaker 6: the market is priced to i mean, not perfection perhaps, but.

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Speaker 3: To a very politive scenario.

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Speaker 6: And so in that kind of situation, my instinct would

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Speaker 6: always be to build in a little bit of mean

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Speaker 6: reversion and that would give you a modest amount of underperformance.

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Speaker 6: But I wouldn't say that that's a major part of

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Speaker 6: our overall views for the next year.

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Speaker 3: I have a question, and it's one of these things.

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Speaker 4: Maybe it doesn't fit right into this moment in the conversation,

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Speaker 4: but I'm so worried that I'm going to forget it

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Speaker 4: that I'm going to ask it now. So we are

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Speaker 4: recording this December nineteenth. We got that CPI report yesterday

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Speaker 4: came in two point six on Core. This is year

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Speaker 4: over year because we didn't have October data, And then

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Speaker 4: there were people like, wait, they imputed a zero present

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Speaker 4: zero rent growth 's zero shelter inflation for October when

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Speaker 4: they didn't collect the data, et cetera. But then I'm like, Okay,

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Speaker 4: that doesn't sound particularly accurate or that doesn't sound like

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Speaker 4: that sounds a little risky. But on the other hand,

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Speaker 4: we're talking about a year over year number, so I'm

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Speaker 4: not even sure why October really affects that. Can you,

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Speaker 4: just before we go in further explain how I should

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Speaker 4: understand yesterday's CPI report.

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Speaker 6: Yeah, I mean they use a six month growth rate

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Speaker 6: for rents, and they did assume a zero sequentially for October,

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Speaker 6: and that does take away from the year on year

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Speaker 6: growth rate as of the November number as well. So

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Speaker 6: we do think that shelter inflation in yesterday's numbers was understated,

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Speaker 6: and the numbers are not quite as good as the

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Speaker 6: eight basis points for core CPI on average for October

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Speaker 6: and November.

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Speaker 3: Capture would suggest.

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Speaker 4: So capturing rent is not like measuring bananas, where I

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Speaker 4: could say, here's the price of a banana in November

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Speaker 4: twenty twenty five, here's the price of a banana November

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Speaker 4: twenty twenty four. Therefore, you could just do a year

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Speaker 4: over year thing.

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Speaker 6: You can't do that because they don't. They don't do

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Speaker 6: it that way. They don't look at just one month.

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Speaker 2: And it's also owners equivalent, right, Well.

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Speaker 6: That's that's a separate point because this distortion affects both

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Speaker 6: actual rent and own as a close brand.

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Speaker 3: So it wasn't as good.

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Speaker 6: And there probably also were some other distortions stemming from

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Speaker 6: the fact that prices were collected in the second half

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Speaker 6: of November pretty close to Thanksgiving, pretty close to the

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Speaker 6: Black Friday deals that may have understated prices in the

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Speaker 6: goods sector. But I think if you step back and

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Speaker 6: look at the inflation news more big picture, it's pretty encouraging.

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Speaker 6: We've seen twenty twenty five a meaningful amount of pass

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Speaker 6: through from tariffs. We think about fifty basis points of

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Speaker 6: contribution to core PC inflation. Core PC inflation in that

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Speaker 6: environment has been going sideways. So if you take out

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Speaker 6: the fifty basis points, if you think that that's really

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Speaker 6: a price level effect, that's more like a value added

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Speaker 6: tax increase and is going to come out of the

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Speaker 6: numbers in twenty twenty six. Then we've seen ongoing disinflation

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Speaker 6: to an underlying rate that's no longer that far away

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Speaker 6: from two percent, and that's pretty good news.

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Speaker 2: Can we talk about prices and tariffs? And I'm very

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Speaker 2: curious casting your mind back to April this year, April second,

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Speaker 2: when all the tariff announcements came out, what was your

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Speaker 2: base case for the impact on inflation, because there seemed

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Speaker 2: to be two schools of thought. There are people who

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Speaker 2: think companies are going to use tariffs as an excuse

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Speaker 2: to raise their prices, and then there are people who

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Speaker 2: think that tariffs end up being disinflationary because they basically

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Speaker 2: take money out of consumers pockets.

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Speaker 6: Like attacks, we had probably more like one hundred basis

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Speaker 6: points of pass through, and we ended up, I mean.

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Speaker 3: So far, I think with about fifty basis points.

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Speaker 6: And there's still a question of how much of this

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Speaker 6: reflects just a smaller pact, greater absorption maybe by the

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Speaker 6: business sector and perhaps to a small degree by foreign producers,

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Speaker 6: although I actually think that number is relatively small versus

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Speaker 6: just a different time profile and a longer lag. We

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Speaker 6: don't know that yet, but it's probably some combination of

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Speaker 6: the two the one thing that I think has been

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Speaker 6: consistent in terms of how we think about it is

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Speaker 6: that this is more of a price level effect. And

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Speaker 6: I've seen a lot of VAT increases in European economies

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Speaker 6: where vit rates often move usually upwards rather than downwards.

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Speaker 6: And we've got many precedents that have shown, you know,

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Speaker 6: a twelve month increase in inflation on the back of

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Speaker 6: one of these tax increases, and then a decline when

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Speaker 6: that gets cycled out.

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Speaker 4: Ben let's talk about tariffs on the stock market, because

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Speaker 4: if the stock games had just been driven by a

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Speaker 4: bunch of big tech companies, we say, oh, of course

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Speaker 4: the teriffs didn't matter, because you know, they're not as

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Speaker 4: tariff sensitive, et cetera. But when we're talking about the

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Speaker 4: fact that the S and P four ninety three also

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Speaker 4: did very well, it's not intuitive to me. I would

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Speaker 4: I guess crymp margins, I would I guess lower sales,

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Speaker 4: all kinds of things. How did it all shake out?

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Speaker 4: From the equity perspective, the impact of tariffs?

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Speaker 5: This was our concern too. Most of earnings variability is

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Speaker 5: driven by margin variability. When you have years with very

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Speaker 5: large earnings growth or very poor earnings growth, it's usually

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Speaker 5: because of margins, and earlier this year we were concerned that,

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Speaker 5: in part because of tariffs, margins would get squeezed and

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Speaker 5: that would weigh on earnings.

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Speaker 4: Wasn't just you who is concerned.

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Speaker 5: And it really didn't materialize. Now, thank Part of what

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Speaker 5: we have to keep in mind is the counterfactual. Right, So,

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Speaker 5: for the last couple quarters, SMB five hundred profit margins

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Speaker 5: have basically been flat well in an environment of pretty

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Speaker 5: healthy nominal GDP growth, Normally you would expect some operating

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Speaker 5: leverage that would cause margins to expand, and so I

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Speaker 5: think part of the story here is you didn't get

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Speaker 5: that counterfactual. But we seen consistently over the last few

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Speaker 5: quarters companies across earnings calls really point to three levers

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Speaker 5: they've been pulling to offset these pressures. One is, of course,

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Speaker 5: as Yihon mentioned, pushing through some in the form of prices.

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Speaker 5: Second is both pushing back on suppliers to absorb some

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Speaker 5: of the costs and restructuring supply chains were necessary. And

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Speaker 5: the third is cutting costs improving efficiency within companies, and

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Speaker 5: that ties back to the slightly better productivity story we've seen.

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Speaker 2: So we talked about rising productivity early, and you think

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Speaker 2: that the main boost from it is yet to come.

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Speaker 2: Who actually captures that productivity acceleration when it comes to

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Speaker 2: the equity market, Like you know, the big tech guys,

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Speaker 2: they've risen quite a lot, and now we're seeing some

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Speaker 2: of the non tech companies start to catch up. Who's

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Speaker 2: going to benefit the most?

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Speaker 5: This is, I guess to call it a trillion dollar

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Speaker 5: question is to understate the value of this question. I

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Speaker 5: think the general consensus, certainly that we have and that

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Speaker 5: most of our clients have, is that AI eventually will

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Speaker 5: create a very large productivity boost to the economy that

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Speaker 5: will create value for someone. Who that someone is is

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Speaker 5: hard to answer. And as I mentioned earlier, what the

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Speaker 5: market has been doing given that uncertainty over the last

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Speaker 5: couple of years is really focusing on near term earnings.

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Speaker 5: It's been the semiconductors, obviously, It's been the hyperscalers to

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Speaker 5: some extent, power companies, etc. I think that is actually

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Speaker 5: one of the key differences between this market and what

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Speaker 5: happened twenty five years ago during the dot com bubble,

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Speaker 5: where we saw valuations expand quite dramatically as investors tried

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Speaker 5: to look forward and guess at the productivity gains and

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Speaker 5: the economic benefits. Today investors are saying, we saw what

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Speaker 5: happened that time. It's too hard, and so what we're

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Speaker 5: really going to focus on is the earnings today.

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Speaker 4: This is really important. So your view is that, at

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Speaker 4: least from the behavior of public equity investors, you do

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Speaker 4: not see any particular element of people letting their imaginations

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Speaker 4: run wild.

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Speaker 5: Of course, there are exceptions at the stock level, sure,

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Speaker 5: and to some extent, if a stock trades hand in

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Speaker 5: hand with earnings that are growing dramatically because of AI

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Speaker 5: capex investment, the implicit assumption is the earnings from that

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Speaker 5: investment are sustained over a long period of time. So

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Speaker 5: maybe one could argue, actually the prices should go up

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Speaker 5: by less than earnings. So I won't say there's no

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Speaker 5: opti in the market with valuations at the current level.

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Speaker 5: There's clearly optimism, but it's a very different kind of

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Speaker 5: optimism from frankly, what I expected a few years ago,

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Speaker 5: which is, to tracy your question, investors will be asking

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Speaker 5: who are the long term winners and trying to pay

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Speaker 5: for those immediately. That has really not been the story.

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Speaker 5: I would actually say That's the key pivot that's happened

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Speaker 5: in our conversations with clients over the last few months,

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Speaker 5: which is as this anxiety has built up about the

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Speaker 5: AI infrastructure trade and as for the first time we've

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Speaker 5: seen some public companies discreetly quantify the earnings boost of AI.

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Speaker 5: The narrative is shifted from how much will the semiconductors

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Speaker 5: and other infrastructure companies make next year? Two? How can

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Speaker 5: we identify long term productivity winners?

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Speaker 2: What would make you nervous when it comes to valuations

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Speaker 2: in general? This maybe like indiscriminate investment in anything that

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Speaker 2: has the word AI in it.

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Speaker 5: That would do it? Yeah, okay, I think if you

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Speaker 5: look historically, you know it's hard to quantify speculative activity

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Speaker 5: or over EXUBERANTCE. But we try, and so a few

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Speaker 5: months ago we actually built something we call it Speculative

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Speaker 5: Activity Trade Indicator. It looks at trading volumes, for example,

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Speaker 5: in stocks with no profits, trading volumes in stocks with

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Speaker 5: extraordinarily high valuation multiples. As you might expect, that has

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Speaker 5: risen this year, but it is comforting to me that

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Speaker 5: is still well below levels that we saw twenty five

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Speaker 5: years ago and even five years ago in the twenty

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Speaker 5: twenty one experience.

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Speaker 4: Yeah, there's a question. It's I had not even really

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Speaker 4: a twenty twenty six question. But you know, one of

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Speaker 4: the reasons we've always loved talking to you is beyond

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Speaker 4: just the forecast, et cetera. Consider you gould be sort

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Speaker 4: of a deep macro thinker with a rooted in academic ideas.

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Speaker 4: Economists seem, you know, fairly strict on the idea that like, yes,

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Speaker 4: new technologies could put some people out of work, and

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Speaker 4: that's obviously painful, but in the aggregate, tech doesn't destroy jobs.

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Speaker 4: Is there any reason to think that AI would be

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Speaker 4: any different? I mean, this is what scares people, right,

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Speaker 4: that there's going to be ten people who have all

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Speaker 4: the money and the rest of us are going to

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Speaker 4: be living and universal basic income. AI may very well

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Speaker 4: be a good podcast host at some time, and maybe

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Speaker 4: podcasts will go away, But like in the broad thinking,

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Speaker 4: is there any reason to think that somehow this time

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Speaker 4: it's different with the relationship between tech and labor.

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Speaker 6: I mean, history certainly doesn't support it. From the perspective

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Speaker 6: of the long term outcomes. If you look at kind

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Speaker 6: of intervals of you know, ten twenty years, you cannot

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Speaker 6: find an adverse relationship between more productivity growth, even if

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Speaker 6: it's more labor productivity growth that at the industry level

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Speaker 6: puts people out of work and aggregate unemployment. What you

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Speaker 6: can find is increases in frictional unemployment. When you see

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Speaker 6: productivity acceleration. It takes a while for the new jobs

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Speaker 6: to be created in other industries to compensate for the

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Speaker 6: jobs that are being lost in the affected industries, and

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Speaker 6: we do build in some of that into our forecast,

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Speaker 6: and then it really becomes a question of how quickly

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Speaker 6: the adoption really occurs. If it happens over say a decade,

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Speaker 6: if you look at the entire economy, and you know,

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Speaker 6: people think that's way too slow, But I actually don't

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Speaker 6: think it's a crazy idea to think that this takes

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Speaker 6: a while to diffuse through the economy, not just the

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Speaker 6: most innovative companies, but all companies and at all levels.

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Speaker 6: I do think it's going to take a number of

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Speaker 6: years that would probably give the economy time to adapt

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Speaker 6: and create jobs in other areas. But if it's much faster,

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Speaker 6: then I'd be more worried about short term increases in

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Speaker 6: frictional unemployment. So it's important to keep an open mind,

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Speaker 6: even though I would say my underlying view is on

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Speaker 6: the optimistic side that we will be able to cope

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Speaker 6: with this structural change the way that the US and

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Speaker 6: world economy has coped with technological advancement in the past.

441
00:22:57,600 --> 00:22:59,600
Speaker 2: Can you talk a little bit about what's been going

442
00:22:59,600 --> 00:23:03,240
Speaker 2: on with consumer spending because unemployment, you know, getting a

443
00:23:03,240 --> 00:23:06,280
Speaker 2: little bit softer, but we haven't really seen a significant

444
00:23:06,359 --> 00:23:09,239
Speaker 2: hit to consumer spending. And yet if you look at

445
00:23:09,240 --> 00:23:13,720
Speaker 2: the sentiment surveys, everyone is miserable at the moment, but

446
00:23:13,760 --> 00:23:16,359
Speaker 2: they keep buying stuff. What is going on there?

447
00:23:16,760 --> 00:23:21,240
Speaker 6: I think the sentiment surveys have been getting less and

448
00:23:21,440 --> 00:23:27,280
Speaker 6: less useful for predicting activity, and that's true for the

449
00:23:27,280 --> 00:23:31,600
Speaker 6: consumer sentiment surveys, and the University of Michigan in particular

450
00:23:31,640 --> 00:23:34,200
Speaker 6: has been quite far out of line with what we've seen.

451
00:23:34,520 --> 00:23:37,520
Speaker 6: But it's actually true more broadly if you think back

452
00:23:38,080 --> 00:23:42,159
Speaker 6: to ten years ago, twenty years ago, just the importance

453
00:23:42,200 --> 00:23:48,000
Speaker 6: of the ism print for markets and the importance now

454
00:23:48,200 --> 00:23:49,719
Speaker 6: it's just nowhere close.

455
00:23:50,119 --> 00:23:51,480
Speaker 3: We still look at.

456
00:23:51,240 --> 00:23:54,879
Speaker 6: The business service and the consumer surveys because they have

457
00:23:55,000 --> 00:23:57,639
Speaker 6: interesting detail, they're very up to date, but they just

458
00:23:57,760 --> 00:24:01,119
Speaker 6: don't work as well as the US, or certainly we're

459
00:24:01,200 --> 00:24:04,240
Speaker 6: believed to. So I would really focus more on the

460
00:24:04,280 --> 00:24:07,920
Speaker 6: heart data. The heart data would say that the consumer

461
00:24:08,000 --> 00:24:12,000
Speaker 6: is doing okay. Consumer spending is certainly not super rapid.

462
00:24:12,160 --> 00:24:15,560
Speaker 6: Maybe we'll get to two percent or so next year,

463
00:24:15,680 --> 00:24:18,280
Speaker 6: but I think consumer spending in real charms is likely

464
00:24:18,400 --> 00:24:23,040
Speaker 6: to lag the overall economy. There are obviously differences between

465
00:24:23,440 --> 00:24:26,000
Speaker 6: the top end. I mean the levels obviously, but also

466
00:24:26,040 --> 00:24:29,720
Speaker 6: the growth rates towards the top end versus the bottom end.

467
00:24:30,200 --> 00:24:32,920
Speaker 6: That's a little bit hard to really assess in real

468
00:24:33,000 --> 00:24:36,640
Speaker 6: time because the official consumer spending numbers are not broken

469
00:24:36,720 --> 00:24:39,720
Speaker 6: down and at a very high frequency in the very

470
00:24:39,760 --> 00:24:42,719
Speaker 6: up to date numbers. But it is a mixed picture

471
00:24:42,760 --> 00:24:46,439
Speaker 6: out there. But I would expect under our forecast for

472
00:24:46,480 --> 00:24:48,840
Speaker 6: the economy, I would expect the consumer to hang in there.

473
00:24:49,480 --> 00:24:53,080
Speaker 2: What would be your desert island economic indicator for next year?

474
00:24:53,359 --> 00:24:55,200
Speaker 2: You're stuck on an island. You can only look at

475
00:24:55,200 --> 00:24:56,879
Speaker 2: one thing to gauge the direction of.

476
00:24:56,840 --> 00:24:59,320
Speaker 3: The always be hard to beat the unemployment rate.

477
00:24:59,440 --> 00:25:02,440
Speaker 2: Okay, So on the unemployment rate, we should talk about

478
00:25:02,440 --> 00:25:04,919
Speaker 2: the FED right because this time next year we're going

479
00:25:05,000 --> 00:25:07,960
Speaker 2: to have a new FED chair and almost like a

480
00:25:08,040 --> 00:25:10,760
Speaker 2: year of performance already. When does he actually come in

481
00:25:10,800 --> 00:25:15,159
Speaker 2: like April or something may Okay, well, a significant amount

482
00:25:15,160 --> 00:25:17,879
Speaker 2: of performance in the role already. How much of a

483
00:25:18,040 --> 00:25:21,359
Speaker 2: change is a new FED chair when it comes to

484
00:25:21,960 --> 00:25:23,959
Speaker 2: your economic forecast.

485
00:25:24,160 --> 00:25:28,160
Speaker 6: I mean it's probably not a lot. We're very unlikely

486
00:25:28,240 --> 00:25:32,840
Speaker 6: to make a forecast change on the back of an appointment,

487
00:25:33,359 --> 00:25:36,800
Speaker 6: and I don't know who it's going to be. It's

488
00:25:36,840 --> 00:25:41,160
Speaker 6: a committee, so there is more continuity in the system

489
00:25:41,280 --> 00:25:45,639
Speaker 6: than I think people sometimes believe when they talk about

490
00:25:45,720 --> 00:25:52,720
Speaker 6: the different potential candidates. So at least in the say, six, twelve,

491
00:25:52,960 --> 00:25:57,280
Speaker 6: eighteen month forward horizon, I wouldn't really expect a major

492
00:25:57,440 --> 00:25:58,639
Speaker 6: change in terms.

493
00:25:58,359 --> 00:25:59,639
Speaker 3: Of the policy outcomes.

494
00:26:00,000 --> 00:26:03,000
Speaker 6: Obviously, the further out you goal, the more room there

495
00:26:03,160 --> 00:26:06,760
Speaker 6: is for people to turn over on the committee, that's

496
00:26:06,800 --> 00:26:09,000
Speaker 6: through on the Board of Governors. That's true among the

497
00:26:09,000 --> 00:26:11,760
Speaker 6: Federal Reserve Bank presidents, and that could have more of

498
00:26:11,800 --> 00:26:14,119
Speaker 6: an impact. But in the NIA charm I would not

499
00:26:14,240 --> 00:26:17,359
Speaker 6: expect a massively different outcome because there's a new chair.

500
00:26:17,880 --> 00:26:20,400
Speaker 4: Then, on this note, talk to us about multiples, and

501
00:26:20,520 --> 00:26:23,800
Speaker 4: obviously you talk about the importance of earnings obviously, and

502
00:26:23,840 --> 00:26:27,920
Speaker 4: then how frequently margin expansion is important, But then there's

503
00:26:27,960 --> 00:26:31,359
Speaker 4: also the multiples question. Where are we now in terms

504
00:26:31,400 --> 00:26:34,000
Speaker 4: of how you thinking about multiples, and then when you

505
00:26:34,040 --> 00:26:36,000
Speaker 4: think where we're going and how much is that going

506
00:26:36,000 --> 00:26:40,200
Speaker 4: to be tied sort of implicitly to perceptions of policy trajectory.

507
00:26:40,400 --> 00:26:43,679
Speaker 5: Multiples high. There's no debating that, certainly, if you're comparing

508
00:26:43,720 --> 00:26:46,040
Speaker 5: with history, is high in the last few decades. We've

509
00:26:46,040 --> 00:26:48,920
Speaker 5: really only seen how higher multiple very briefly during the

510
00:26:48,960 --> 00:26:51,800
Speaker 5: post COVID period, the reopening and of course in the

511
00:26:51,880 --> 00:26:52,760
Speaker 5: late nineteen nineties.

512
00:26:52,760 --> 00:26:55,399
Speaker 4: Done in that the post COVID is because no one

513
00:26:55,480 --> 00:26:56,879
Speaker 4: had made any money for like two quarters.

514
00:26:56,920 --> 00:26:58,479
Speaker 5: Well, I think that's a key point, which is one

515
00:26:58,520 --> 00:27:01,840
Speaker 5: of the things that drives the multiple is expectations of

516
00:27:01,880 --> 00:27:06,080
Speaker 5: accelerating or improving earnings. And from that perspective, if I

517
00:27:06,119 --> 00:27:08,840
Speaker 5: listened to Yon's forecast for a healthy economy that's improving,

518
00:27:09,200 --> 00:27:11,640
Speaker 5: it's not necessarily so strange to me that the multiple

519
00:27:11,800 --> 00:27:14,000
Speaker 5: is pretty elevated. The other thing I'd point out is

520
00:27:14,160 --> 00:27:16,040
Speaker 5: if we sat here a year ago, or frankly, if

521
00:27:16,040 --> 00:27:18,080
Speaker 5: we sat here at the beginning of nineteen ninety nine,

522
00:27:18,320 --> 00:27:20,879
Speaker 5: weren't many podcasts back then, but we'll use our imagination,

523
00:27:21,440 --> 00:27:24,400
Speaker 5: the multiple was exactly where it is today, and that

524
00:27:24,440 --> 00:27:26,119
Speaker 5: didn't really tell you anything about what to do with

525
00:27:26,119 --> 00:27:29,040
Speaker 5: the market over the short term. So I view valuations

526
00:27:29,560 --> 00:27:32,160
Speaker 5: through a physics lens as a measure of potential energy.

527
00:27:32,200 --> 00:27:34,600
Speaker 5: They tell you a lot about how much the market

528
00:27:34,680 --> 00:27:37,639
Speaker 5: can move if there's a catalyst, but they're not the

529
00:27:37,640 --> 00:27:51,679
Speaker 5: catalyst themselves.

530
00:27:54,520 --> 00:27:56,960
Speaker 2: I know you talked earlier about how you're not seeing

531
00:27:57,040 --> 00:28:01,639
Speaker 2: people invest in the AI productivity story indiscriminately. But when

532
00:28:01,720 --> 00:28:05,560
Speaker 2: it comes to an expected productivity boost from this new technology,

533
00:28:05,840 --> 00:28:09,400
Speaker 2: what concrete evidence are you saying that this is actually

534
00:28:09,440 --> 00:28:12,679
Speaker 2: happening versus people talking their books.

535
00:28:12,960 --> 00:28:15,600
Speaker 5: Well, about sixty percent of S and B companies say

536
00:28:16,000 --> 00:28:18,560
Speaker 5: AI every quarter on their earnings, true, and you can

537
00:28:18,600 --> 00:28:21,919
Speaker 5: probably count on one hand how many are actually quantifying it.

538
00:28:21,960 --> 00:28:24,120
Speaker 5: So I don't think you should expect to really see

539
00:28:24,119 --> 00:28:26,360
Speaker 5: it in the numbers today. Actually, for the first time,

540
00:28:26,400 --> 00:28:28,840
Speaker 5: we are modeling an AI productivity boost in our S

541
00:28:28,840 --> 00:28:31,399
Speaker 5: and P five hundred earnings forecast for next year, and

542
00:28:31,480 --> 00:28:34,480
Speaker 5: the magnitude of that boost is under half a percent,

543
00:28:34,600 --> 00:28:37,080
Speaker 5: so we still think even next year it'll be quite small.

544
00:28:37,240 --> 00:28:39,920
Speaker 5: But the important thing is it is growing over time.

545
00:28:39,960 --> 00:28:44,640
Speaker 6: But that's the users of AI rather than the investment.

546
00:28:44,840 --> 00:28:47,680
Speaker 5: Correct when you're spending hundreds of billions of dollars in capex,

547
00:28:48,240 --> 00:28:51,520
Speaker 5: the AI boost in terms of those dollars has clearly

548
00:28:51,560 --> 00:28:52,800
Speaker 5: been large for the last couple of years.

549
00:28:52,880 --> 00:28:56,360
Speaker 4: So you're talking about the concentration of equities within the

550
00:28:56,480 --> 00:28:59,000
Speaker 4: S and P five hundred, very top heavy. How does

551
00:28:59,040 --> 00:29:02,040
Speaker 4: that compare with the concentration of earnings within the S

552
00:29:02,080 --> 00:29:02,840
Speaker 4: and P five hundred.

553
00:29:03,000 --> 00:29:05,720
Speaker 5: That is a key point that is I think often underappreciated,

554
00:29:06,160 --> 00:29:08,480
Speaker 5: which is five years ago the top ten stocks in

555
00:29:08,520 --> 00:29:10,560
Speaker 5: the market accounted for a third of market cap. This

556
00:29:10,680 --> 00:29:12,320
Speaker 5: was a record at the time, although we look back

557
00:29:12,320 --> 00:29:17,120
Speaker 5: and think wasn't so bad, and fast forward now they

558
00:29:17,160 --> 00:29:19,960
Speaker 5: are a third of earnings. So one way to conceptualize

559
00:29:19,960 --> 00:29:22,720
Speaker 5: this is the market was correctly looking forward back then

560
00:29:23,040 --> 00:29:25,480
Speaker 5: and saying earnings are going to grow. And so today,

561
00:29:25,720 --> 00:29:28,120
Speaker 5: if the top ten companies are forty percent of market

562
00:29:28,120 --> 00:29:31,040
Speaker 5: cap and a third of earnings, the question is will

563
00:29:31,040 --> 00:29:34,240
Speaker 5: they continue to outperform on an earnings basis over the

564
00:29:34,240 --> 00:29:36,800
Speaker 5: next few years. Well, given the current run rate of

565
00:29:36,840 --> 00:29:39,240
Speaker 5: earnings growth, it looks very likely that the answer will

566
00:29:39,240 --> 00:29:42,600
Speaker 5: be yes, law perform although on our forecasts that gap

567
00:29:42,640 --> 00:29:43,640
Speaker 5: will shrink a little.

568
00:29:43,440 --> 00:29:46,360
Speaker 6: Bit and then markets might look forward further than that,

569
00:29:46,600 --> 00:29:49,880
Speaker 6: and that I mean, that's been part of the issue

570
00:29:50,040 --> 00:29:51,200
Speaker 6: for some of them.

571
00:29:51,080 --> 00:29:53,160
Speaker 5: More recently, and that's how you create valuation problems.

572
00:29:53,280 --> 00:29:53,640
Speaker 3: Tracy.

573
00:29:53,680 --> 00:29:57,280
Speaker 4: When I hear that big tech companies only have about

574
00:29:57,280 --> 00:29:59,360
Speaker 4: a third of the earnings of the S and P

575
00:29:59,480 --> 00:30:03,200
Speaker 4: five hundred, my thought is, well, that's seventy percent of

576
00:30:03,280 --> 00:30:04,800
Speaker 4: all corporate earnings that they have.

577
00:30:04,880 --> 00:30:05,760
Speaker 3: Yet to swallow.

578
00:30:05,880 --> 00:30:08,760
Speaker 4: Right, think of all of these earnings that are accruing

579
00:30:08,800 --> 00:30:11,400
Speaker 4: to non tech companies. All of that is going to

580
00:30:11,440 --> 00:30:15,800
Speaker 4: be Amazon's, Amazon and Alphabet's income in the future world.

581
00:30:15,880 --> 00:30:18,560
Speaker 4: They're still upside Yeah, there's still seventy percent. They're still

582
00:30:18,560 --> 00:30:21,440
Speaker 4: the majority of money is not being made by tech companies.

583
00:30:21,520 --> 00:30:24,720
Speaker 2: Okay, wait, I got to ask though, Yes, tech companies

584
00:30:24,720 --> 00:30:28,080
Speaker 2: have seen you very dominant in recent years, But what

585
00:30:28,120 --> 00:30:31,040
Speaker 2: would it take to make you a little bit nervous

586
00:30:31,200 --> 00:30:34,760
Speaker 2: about the outlook for next year, the broad market outlook,

587
00:30:35,240 --> 00:30:37,800
Speaker 2: Like what would you need to see to think like, oh,

588
00:30:37,800 --> 00:30:40,240
Speaker 2: wait a second, we're kind of getting ahead of ourselves,

589
00:30:40,360 --> 00:30:42,880
Speaker 2: or I think maybe my target is a little more

590
00:30:42,920 --> 00:30:44,880
Speaker 2: optimistic than I had expected.

591
00:30:45,040 --> 00:30:47,280
Speaker 5: First I think an investors should always be a little nervous.

592
00:30:47,320 --> 00:30:49,640
Speaker 5: That's the reflection of equity risk premium, which is how

593
00:30:49,640 --> 00:30:51,720
Speaker 5: the market generates return over time, or at least part

594
00:30:51,720 --> 00:30:54,400
Speaker 5: of how the market generates return over time. Well, first,

595
00:30:54,680 --> 00:30:56,680
Speaker 5: you know Jan mentioned his Desert Island indicator being the

596
00:30:56,760 --> 00:31:00,640
Speaker 5: unemployment rate. For me, every Thursday morning, I wake up

597
00:31:00,680 --> 00:31:02,040
Speaker 5: excited to see jobless claims.

598
00:31:02,120 --> 00:31:04,320
Speaker 4: This is I've said it many times. I'm a claims guy.

599
00:31:04,440 --> 00:31:05,880
Speaker 4: When it comes to my Desert Island.

600
00:31:05,960 --> 00:31:08,560
Speaker 5: We're on the same page of Bros. So you know,

601
00:31:08,600 --> 00:31:10,160
Speaker 5: if a few thursdays in a row we start to

602
00:31:10,200 --> 00:31:13,520
Speaker 5: see claims rise, I'll become a lot more nervous. If

603
00:31:13,640 --> 00:31:15,880
Speaker 5: Yon walks down the hall one day and says, you know,

604
00:31:15,920 --> 00:31:17,600
Speaker 5: we think the Fed's going to hike at the next meeting,

605
00:31:18,200 --> 00:31:21,640
Speaker 5: I'll be nervous about that too. One consistent pattern at

606
00:31:21,640 --> 00:31:24,120
Speaker 5: the top of almost every equity bull market in the

607
00:31:24,160 --> 00:31:27,360
Speaker 5: past has been tightening FED policy instead of easing policy

608
00:31:27,360 --> 00:31:29,000
Speaker 5: that we have today. And then, of course the third

609
00:31:29,120 --> 00:31:31,680
Speaker 5: is you know, this is a very small and maybe

610
00:31:31,720 --> 00:31:34,160
Speaker 5: silly example, but a couple of years ago, I remember

611
00:31:34,240 --> 00:31:36,959
Speaker 5: when the gop one drugs were being rolled out, there

612
00:31:37,040 --> 00:31:39,240
Speaker 5: was a very brief window where investors were talking about

613
00:31:39,240 --> 00:31:42,120
Speaker 5: buying the airline stocks on the basis that fuel costs

614
00:31:42,120 --> 00:31:42,680
Speaker 5: would be lower.

615
00:31:42,920 --> 00:31:43,080
Speaker 3: Right.

616
00:31:43,680 --> 00:31:46,560
Speaker 5: Yeah, When this narrative, this type of narrative starts to

617
00:31:46,560 --> 00:31:49,640
Speaker 5: emerge in my conversations, that's the kind of time where

618
00:31:49,640 --> 00:31:52,480
Speaker 5: I think you will be seeing prices run ahead of earnings, which,

619
00:31:52,480 --> 00:31:54,320
Speaker 5: as I mentioned, has really not been the case. I'll

620
00:31:54,360 --> 00:31:55,120
Speaker 5: be a lot more nervous.

621
00:31:55,160 --> 00:31:56,160
Speaker 3: Then. That's interesting.

622
00:31:56,200 --> 00:31:59,080
Speaker 4: So when you just start to see investors start to

623
00:31:59,400 --> 00:32:03,360
Speaker 4: justify things on various bank shots, the narratives, Yeah, and

624
00:32:03,440 --> 00:32:06,000
Speaker 4: that's just sort of like it's like a behavioral sign

625
00:32:06,080 --> 00:32:07,960
Speaker 4: that maybe people are starting to get over their skates

626
00:32:07,960 --> 00:32:08,200
Speaker 4: a bit.

627
00:32:08,360 --> 00:32:11,000
Speaker 5: I think this has been one of the least enthusiastic

628
00:32:11,280 --> 00:32:14,960
Speaker 5: markets that is often described as a bubble in recent history.

629
00:32:15,160 --> 00:32:18,200
Speaker 4: You know what happened to housing? And when I say that,

630
00:32:18,440 --> 00:32:21,120
Speaker 4: I mean I feel that we could go a whole

631
00:32:21,120 --> 00:32:25,000
Speaker 4: conversation talking about the economy these days without talking about

632
00:32:25,040 --> 00:32:27,719
Speaker 4: how a mediocre the housing market is doing, whether we're

633
00:32:27,720 --> 00:32:30,520
Speaker 4: talking about prices, whether it starts basically every measure of

634
00:32:30,560 --> 00:32:34,000
Speaker 4: housing not very good. And yet by and large, in

635
00:32:34,680 --> 00:32:37,000
Speaker 4: conversations about the economy, you know, we used to there

636
00:32:37,080 --> 00:32:39,120
Speaker 4: used to be the housing cycle is the business cycle,

637
00:32:39,400 --> 00:32:42,200
Speaker 4: even setting aside the crisis of two thousand and eight

638
00:32:42,200 --> 00:32:44,600
Speaker 4: two thousand and nine, housing is linked to the economy

639
00:32:44,680 --> 00:32:47,320
Speaker 4: has always or for a long time, felt very robust.

640
00:32:47,480 --> 00:32:48,280
Speaker 3: Has that changed?

641
00:32:48,800 --> 00:32:53,560
Speaker 6: It's amazing how if I look back to well, certainly

642
00:32:54,200 --> 00:32:57,000
Speaker 6: run up to eight and the couple of years after,

643
00:32:57,440 --> 00:33:01,160
Speaker 6: how we rolled, I don't know, thirty percent, forty percent,

644
00:33:01,320 --> 00:33:05,480
Speaker 6: fifty percent of what we were putting out on housing,

645
00:33:05,520 --> 00:33:08,840
Speaker 6: and the spillovers from housing and mortgage equity withdrawal and

646
00:33:09,400 --> 00:33:13,760
Speaker 6: leveraged losses because of mortgage credit exposures on bank balance sheets,

647
00:33:14,120 --> 00:33:17,280
Speaker 6: and how it is now such a small part of

648
00:33:17,320 --> 00:33:20,160
Speaker 6: the discussion because it's been kind of a tug of war,

649
00:33:20,240 --> 00:33:23,560
Speaker 6: I think between you know, on the one hand, low

650
00:33:23,680 --> 00:33:29,600
Speaker 6: vacancy rates and therefore a supportive supply picture for housing

651
00:33:29,680 --> 00:33:33,760
Speaker 6: activity and house prices, and at the same time already

652
00:33:34,040 --> 00:33:39,080
Speaker 6: high price levels, bad affordability, still reasonably high mortgage rates,

653
00:33:39,480 --> 00:33:42,560
Speaker 6: and it just hasn't really moved very much now. Of course,

654
00:33:42,960 --> 00:33:47,400
Speaker 6: we've also seen demographic changes that just result in less

655
00:33:47,400 --> 00:33:51,600
Speaker 6: housing turnover, but it is not a major feature of

656
00:33:51,640 --> 00:33:55,840
Speaker 6: our outlook for twenty twenty six. We have housing go

657
00:33:56,360 --> 00:33:59,560
Speaker 6: you know, more or less sideways from here, low positive

658
00:33:59,640 --> 00:34:04,000
Speaker 6: number for price appreciation, and you know, I think the

659
00:34:04,040 --> 00:34:07,920
Speaker 6: action is really really elsewhere, more on the investment side,

660
00:34:07,960 --> 00:34:10,680
Speaker 6: and obviously a lot of the technology issues that we've

661
00:34:10,680 --> 00:34:11,320
Speaker 6: been discussing.

662
00:34:11,800 --> 00:34:13,840
Speaker 2: We would be remiss if we didn't talk about the

663
00:34:13,880 --> 00:34:19,080
Speaker 2: world's second biggest economy, which is China. So in your outlook,

664
00:34:19,280 --> 00:34:22,000
Speaker 2: you say you expect China to hold up well, and

665
00:34:22,080 --> 00:34:24,120
Speaker 2: I think this would be surprising to a lot of

666
00:34:24,120 --> 00:34:28,200
Speaker 2: people who look out at I guess the global trading sphere,

667
00:34:28,239 --> 00:34:31,240
Speaker 2: and it looks like everyone is a raid against China

668
00:34:31,360 --> 00:34:34,960
Speaker 2: in various ways. The US has imposed tariffs, Europe seems

669
00:34:35,000 --> 00:34:38,440
Speaker 2: to want to do something and possibly you know, form

670
00:34:38,480 --> 00:34:42,719
Speaker 2: a coherent block I guess against China. Why haven't we

671
00:34:42,760 --> 00:34:45,000
Speaker 2: seen more of a growth hit to China?

672
00:34:45,600 --> 00:34:50,600
Speaker 6: The manufacturing sector and Chinese exports have just held up

673
00:34:50,880 --> 00:34:57,279
Speaker 6: incredibly well despite a at times punitive level of tariffs

674
00:34:57,400 --> 00:35:02,239
Speaker 6: from the US side. Exports to the US came down

675
00:35:02,239 --> 00:35:05,480
Speaker 6: substantially in a twenty five thirty percent on a year

676
00:35:05,480 --> 00:35:09,399
Speaker 6: on year basis, but exports to other places have held

677
00:35:09,480 --> 00:35:10,040
Speaker 6: up very well.

678
00:35:10,120 --> 00:35:12,560
Speaker 3: Overall, exports are still up five to ten percent.

679
00:35:12,880 --> 00:35:15,920
Speaker 6: They're a little bit noisy, but very healthy growth rates,

680
00:35:16,480 --> 00:35:21,280
Speaker 6: and our expectation is that that's going to continue, mainly

681
00:35:21,360 --> 00:35:26,959
Speaker 6: because China keeps getting better and better at producing better

682
00:35:27,000 --> 00:35:30,040
Speaker 6: and better goods at cheaper and cheaper prices, and it's

683
00:35:30,080 --> 00:35:33,440
Speaker 6: going to be pretty difficult to really stem that for

684
00:35:33,920 --> 00:35:39,600
Speaker 6: other economies. And they also control the supply of rare earths.

685
00:35:39,640 --> 00:35:43,640
Speaker 6: They controlled about seventy percent of the mining, ninety percent

686
00:35:43,840 --> 00:35:48,240
Speaker 6: of the refining. That's a pretty good way to deter

687
00:35:49,120 --> 00:35:51,719
Speaker 6: trade action and tariffs, and I think we saw that

688
00:35:52,000 --> 00:35:55,040
Speaker 6: in the negotiations with the US, but that could be

689
00:35:55,520 --> 00:35:59,960
Speaker 6: relevant for other economies that try to impose tariffs on China.

690
00:36:00,600 --> 00:36:03,319
Speaker 6: So I think the goods producing sector is still going

691
00:36:03,360 --> 00:36:05,960
Speaker 6: to be strong. Now. The flip side is that the

692
00:36:06,040 --> 00:36:09,240
Speaker 6: domestic economy is very weak, and that's a country where

693
00:36:09,280 --> 00:36:13,880
Speaker 6: the housing story is much more central. Housing starts and

694
00:36:13,920 --> 00:36:16,839
Speaker 6: sales are still going down, even though they're already down

695
00:36:16,920 --> 00:36:20,240
Speaker 6: sixty to eighty percent, but they're still going down steeply.

696
00:36:20,520 --> 00:36:25,480
Speaker 6: Prices are still falling steeply. Our China team estimates that

697
00:36:26,160 --> 00:36:29,839
Speaker 6: if you take the direct and indirect effects of property

698
00:36:29,920 --> 00:36:34,080
Speaker 6: on GDP growth, it's subtracted about two percentage points in

699
00:36:34,120 --> 00:36:38,439
Speaker 6: twenty twenty five, and while the worst is probably behind us,

700
00:36:38,680 --> 00:36:40,719
Speaker 6: they still have a one and a half percentage point

701
00:36:40,800 --> 00:36:44,160
Speaker 6: drag next year. So in that sort of environment, you know,

702
00:36:44,200 --> 00:36:47,960
Speaker 6: we think China will hold up okay, you know, slower

703
00:36:47,960 --> 00:36:51,280
Speaker 6: growth over time, but probably still closer to five percent

704
00:36:51,360 --> 00:36:52,160
Speaker 6: than to four percent.

705
00:36:52,680 --> 00:36:55,640
Speaker 4: Then going back to US, doc I sort of joked that,

706
00:36:55,760 --> 00:36:58,040
Speaker 4: you know, there's seventy percent of earnings out there that

707
00:36:58,080 --> 00:37:00,600
Speaker 4: have yet to be captured by big tech companies. But

708
00:37:00,640 --> 00:37:03,000
Speaker 4: I actually kind of don't really think that's a joke

709
00:37:03,160 --> 00:37:05,240
Speaker 4: in the sense that that does seem to be the trend.

710
00:37:05,239 --> 00:37:06,880
Speaker 4: There are a handful of companies that are cruing a

711
00:37:06,880 --> 00:37:09,960
Speaker 4: lot of value when you think about the earnings growth

712
00:37:10,040 --> 00:37:13,160
Speaker 4: that the big tech companies have, the realized earnings growth,

713
00:37:13,200 --> 00:37:15,759
Speaker 4: and you gave the example about how the market sort

714
00:37:15,800 --> 00:37:17,399
Speaker 4: of was correct five years ago that they would come

715
00:37:17,400 --> 00:37:21,080
Speaker 4: to represent thirty percent of earnings. Is there any historical

716
00:37:21,320 --> 00:37:25,680
Speaker 4: precedent for the largest companies in the world to be

717
00:37:25,800 --> 00:37:28,120
Speaker 4: growing like this year after year, because I used to

718
00:37:28,160 --> 00:37:31,759
Speaker 4: think mature companies don't grow like small companies do. Is

719
00:37:31,800 --> 00:37:34,160
Speaker 4: this sort of like a novel phenomenon. When you think

720
00:37:34,200 --> 00:37:35,520
Speaker 4: about the history of markets.

721
00:37:35,680 --> 00:37:38,080
Speaker 5: Part of what's fun about markets is they're always changing.

722
00:37:38,440 --> 00:37:40,279
Speaker 5: This seems to be one of those examples. You know,

723
00:37:40,280 --> 00:37:42,239
Speaker 5: we did a study last year. We looked at one

724
00:37:42,280 --> 00:37:45,440
Speaker 5: hundred years of market concentration in the US, and at

725
00:37:45,520 --> 00:37:47,640
Speaker 5: least over the last century, we didn't find anything that

726
00:37:47,880 --> 00:37:49,040
Speaker 5: quite matches up to today.

727
00:37:49,120 --> 00:37:50,080
Speaker 7: Wow, what do you.

728
00:37:50,040 --> 00:37:53,160
Speaker 2: Think would actually like put an end to that market dominance?

729
00:37:53,200 --> 00:37:55,600
Speaker 2: I guess stronger antitrust laws or what.

730
00:37:55,960 --> 00:37:56,160
Speaker 3: Yeah.

731
00:37:56,200 --> 00:37:59,200
Speaker 5: I keep coming back to earnings, and one way that

732
00:37:59,239 --> 00:38:02,759
Speaker 5: earning's dominance could end, of course, is regulatory policy. I

733
00:38:02,800 --> 00:38:05,239
Speaker 5: think the top of mind question for investors is whether

734
00:38:05,640 --> 00:38:08,960
Speaker 5: this revolutionary shift resulting from AI technology is going to

735
00:38:09,040 --> 00:38:12,440
Speaker 5: change where the earnings end up accruing. But I think

736
00:38:12,440 --> 00:38:15,359
Speaker 5: almost certainly when one day we look back. If one

737
00:38:15,440 --> 00:38:17,720
Speaker 5: day we look back and they're no longer is dominant

738
00:38:17,760 --> 00:38:20,480
Speaker 5: from a market cap perspective, it's going to be because

739
00:38:20,480 --> 00:38:22,040
Speaker 5: their earnings aren't as dominant either.

740
00:38:22,440 --> 00:38:25,000
Speaker 2: You know, we started this conversation talking about the CPI

741
00:38:25,160 --> 00:38:27,440
Speaker 2: number that came out, and I would be curious to

742
00:38:27,520 --> 00:38:30,960
Speaker 2: hear just how unusual this year has been in terms

743
00:38:30,960 --> 00:38:34,040
Speaker 2: of tracking some of the data and dealing with, you know,

744
00:38:34,120 --> 00:38:37,160
Speaker 2: things that you probably haven't had to deal with as

745
00:38:37,160 --> 00:38:41,160
Speaker 2: an economist before, like tariffs on you know, some tiny

746
00:38:41,200 --> 00:38:43,560
Speaker 2: Pacific island or something like that.

747
00:38:43,920 --> 00:38:46,480
Speaker 6: I would echo what benj just said, this is what

748
00:38:46,600 --> 00:38:51,680
Speaker 6: makes markets and economic forecasting fund that there's always something new.

749
00:38:52,040 --> 00:38:56,839
Speaker 6: And of course the extent of the tariff increases that

750
00:38:56,920 --> 00:39:02,280
Speaker 6: we saw on an around Liberation Day is if not unprecedented,

751
00:39:02,320 --> 00:39:05,800
Speaker 6: then at least we haven't seen it in many, many decades.

752
00:39:06,440 --> 00:39:08,759
Speaker 6: So that's a new set of challenges in terms of

753
00:39:08,760 --> 00:39:12,000
Speaker 6: figuring out what the impacts are going to be. It's

754
00:39:12,040 --> 00:39:16,360
Speaker 6: not as extreme as what we've seen at times in

755
00:39:16,400 --> 00:39:20,520
Speaker 6: the prior twenty years or so, certainly compared with COVID.

756
00:39:20,680 --> 00:39:24,560
Speaker 6: I mean, that's where you could effectively throw out a

757
00:39:24,600 --> 00:39:26,880
Speaker 6: lot of the government data and had to look for

758
00:39:27,200 --> 00:39:30,359
Speaker 6: other indicators like cell phone locations to figure out what

759
00:39:30,440 --> 00:39:33,279
Speaker 6: was going on that if not that day, then at

760
00:39:33,400 --> 00:39:36,600
Speaker 6: least that week, and you know, not a month, a

761
00:39:36,640 --> 00:39:37,360
Speaker 6: month earlier.

762
00:39:37,960 --> 00:39:39,640
Speaker 3: So that's been a challenge.

763
00:39:39,719 --> 00:39:42,480
Speaker 6: The government shutdown, I would say, has been more challenging

764
00:39:42,520 --> 00:39:43,520
Speaker 6: than past shutdowns.

765
00:39:43,640 --> 00:39:46,200
Speaker 3: Will actually have holds.

766
00:39:45,719 --> 00:39:49,080
Speaker 6: In the economic data that will probably be there for

767
00:39:50,000 --> 00:39:52,520
Speaker 6: ever and you know, you look at some of the

768
00:39:52,600 --> 00:39:56,239
Speaker 6: labor market numbers. We've had a consistent series for the

769
00:39:56,320 --> 00:39:59,240
Speaker 6: US unemployment rate on a monthly basis since nineteen forty

770
00:39:59,280 --> 00:40:05,319
Speaker 6: eight except for October two thousand and twenty five, and

771
00:40:05,680 --> 00:40:07,040
Speaker 6: that's going to look pretty weird.

772
00:40:07,160 --> 00:40:08,040
Speaker 5: That's kind of crazy.

773
00:40:08,280 --> 00:40:11,040
Speaker 4: What is your outlook for twenty twenty six in terms

774
00:40:11,080 --> 00:40:13,120
Speaker 4: of FED policy? Where do you see this rate cut

775
00:40:13,160 --> 00:40:14,680
Speaker 4: cycle going and how deep.

776
00:40:14,680 --> 00:40:19,040
Speaker 6: We still have a forecast that we've had for the

777
00:40:19,160 --> 00:40:23,360
Speaker 6: last six months, which is after the seventy five bases

778
00:40:23,360 --> 00:40:27,319
Speaker 6: points of insurance cuts in twenty twenty five, two more

779
00:40:27,440 --> 00:40:30,920
Speaker 6: into twenty twenty six, that bring you down to what

780
00:40:30,960 --> 00:40:34,719
Speaker 6: we think is roughly their neutral estimate three to three

781
00:40:34,719 --> 00:40:38,760
Speaker 6: and a quarter percent. We're penciling that in for March

782
00:40:38,840 --> 00:40:41,919
Speaker 6: and June. At the moment, haven't changed that. I would

783
00:40:41,960 --> 00:40:45,799
Speaker 6: say there's a pretty sizable amount of uncertainty around that.

784
00:40:46,600 --> 00:40:51,000
Speaker 6: It's certainly possible that if GDP growth does as well

785
00:40:51,040 --> 00:40:53,560
Speaker 6: as we think and that actually gives a bit more

786
00:40:53,560 --> 00:40:55,760
Speaker 6: of a lift to the labor market, that they would

787
00:40:55,960 --> 00:40:59,600
Speaker 6: wait longer and push that perhaps into the second half.

788
00:41:00,200 --> 00:41:04,200
Speaker 6: But I'm also pretty focused on January ninth, when we

789
00:41:04,320 --> 00:41:08,160
Speaker 6: get the next employment report, because if that shows another

790
00:41:08,239 --> 00:41:10,839
Speaker 6: increase in the unemployment rate, then I think it might

791
00:41:10,920 --> 00:41:13,480
Speaker 6: be hard not to cut at the January meeting. We

792
00:41:13,520 --> 00:41:15,640
Speaker 6: don't have that in the forecast at the moment, but

793
00:41:16,040 --> 00:41:18,840
Speaker 6: I think it's a very real possibility.

794
00:41:18,440 --> 00:41:20,640
Speaker 2: Something to look forward to after we come back for

795
00:41:20,680 --> 00:41:21,520
Speaker 2: your holidays.

796
00:41:21,680 --> 00:41:24,439
Speaker 4: Currently, I think according to work it's just a less

797
00:41:24,440 --> 00:41:27,440
Speaker 4: than twenty percent chance of a cut in January, but

798
00:41:27,560 --> 00:41:29,840
Speaker 4: it sounds and I know you don't expect one, but

799
00:41:29,880 --> 00:41:31,799
Speaker 4: I guess it sounds like there's a condition in which

800
00:41:31,840 --> 00:41:32,799
Speaker 4: that could jump.

801
00:41:33,520 --> 00:41:34,680
Speaker 3: Yes, I think so.

802
00:41:35,200 --> 00:41:37,799
Speaker 2: Yeah, and Ben, thank you so much for coming on

803
00:41:37,880 --> 00:41:39,960
Speaker 2: all thoughts, and I guess we'll have you back on

804
00:41:40,120 --> 00:41:40,560
Speaker 2: next year.

805
00:41:40,760 --> 00:41:42,000
Speaker 4: Yeah, make an anual tradition.

806
00:41:42,120 --> 00:41:44,120
Speaker 2: Yeah, check your forecast against reality.

807
00:41:44,239 --> 00:42:00,799
Speaker 7: So thanks, thank you so much, Thank you so much, Joe,

808
00:42:00,800 --> 00:42:01,720
Speaker 7: that's always fun.

809
00:42:01,880 --> 00:42:02,319
Speaker 3: I love that.

810
00:42:02,680 --> 00:42:05,480
Speaker 2: I do think the point about, you know, whether or

811
00:42:05,520 --> 00:42:07,319
Speaker 2: not we're in a bubble. The one thing that like

812
00:42:07,640 --> 00:42:10,360
Speaker 2: does give me some caution is this idea that like,

813
00:42:10,560 --> 00:42:13,080
Speaker 2: actually everyone's kind of worried about it at the moment,

814
00:42:13,120 --> 00:42:16,799
Speaker 2: and people are talking about the down potential downsides. But

815
00:42:16,840 --> 00:42:20,280
Speaker 2: that said, I also think back to the Internet bubble,

816
00:42:20,360 --> 00:42:23,000
Speaker 2: the dot com bubble, and I mean people were so

817
00:42:23,080 --> 00:42:25,919
Speaker 2: worried about it. They were writing books about a dot

818
00:42:25,960 --> 00:42:29,880
Speaker 2: com bubble, right so at the time before it actually bursts.

819
00:42:29,960 --> 00:42:32,200
Speaker 2: So I don't you know, we've had bubbles before where

820
00:42:32,239 --> 00:42:34,920
Speaker 2: people have been worried and they're still bubbles.

821
00:42:35,560 --> 00:42:39,000
Speaker 4: Yeah, merely observing them does not obviate the existence of one.

822
00:42:39,160 --> 00:42:42,480
Speaker 4: That's right, a couple things. So I love the Yan

823
00:42:42,560 --> 00:42:47,200
Speaker 4: pushback on this very almost consensus meme that AI expenditure

824
00:42:47,200 --> 00:42:51,200
Speaker 4: has been a huge driver of GDP expansion this year,

825
00:42:51,239 --> 00:42:53,560
Speaker 4: and when you talk about I think, you know, it's

826
00:42:53,640 --> 00:42:55,960
Speaker 4: interesting to hear him push back so hard on that,

827
00:42:56,080 --> 00:42:58,600
Speaker 4: given how much of what gets put into the ground

828
00:42:58,640 --> 00:43:02,040
Speaker 4: comes out on the other side via imports. I also,

829
00:43:02,160 --> 00:43:05,920
Speaker 4: you know, look, I'm I love Ben's point about you

830
00:43:05,920 --> 00:43:09,279
Speaker 4: say whatever you will about the big tech companies. They

831
00:43:09,400 --> 00:43:12,440
Speaker 4: deliver monster earnings every year, and it's very interesting to

832
00:43:12,480 --> 00:43:14,799
Speaker 4: hear how like over the last five years, you know,

833
00:43:14,800 --> 00:43:17,640
Speaker 4: look at this crazy concentration and then they catch up

834
00:43:17,680 --> 00:43:19,880
Speaker 4: there to earnings and it turns that the market was

835
00:43:19,960 --> 00:43:20,799
Speaker 4: right again right.

836
00:43:20,840 --> 00:43:23,520
Speaker 2: And it's also true, as he pointed out, that some

837
00:43:23,719 --> 00:43:26,680
Speaker 2: non tech companies are seeing earnings growth too, so it's

838
00:43:26,680 --> 00:43:30,120
Speaker 2: not even a market that's as dominated by big tech

839
00:43:30,160 --> 00:43:32,040
Speaker 2: as it was just like two weeks ago.

840
00:43:32,200 --> 00:43:35,719
Speaker 4: I'm sure that I have contributed it at various times

841
00:43:35,800 --> 00:43:37,560
Speaker 4: to the sort of meme that it's just a tech

842
00:43:37,600 --> 00:43:39,680
Speaker 4: driven you know, like we say that, right, this tech

843
00:43:39,719 --> 00:43:42,319
Speaker 4: driven rally in twenty twenty five, And obviously, look, the

844
00:43:42,360 --> 00:43:45,279
Speaker 4: NASDAK has outperformed the S and P five hundred this year,

845
00:43:45,280 --> 00:43:47,920
Speaker 4: so we know that, like, yes, tech has outperformed, but

846
00:43:48,000 --> 00:43:51,080
Speaker 4: you know, financials have done very well. I hadn't appreciated

847
00:43:51,360 --> 00:43:54,160
Speaker 4: how consistently strong the earnings growth of the S and

848
00:43:54,160 --> 00:43:56,480
Speaker 4: P four ninety three had been over the last three years.

849
00:43:56,600 --> 00:44:00,400
Speaker 2: I also think this idea of productivity keeping on importsloyment

850
00:44:00,719 --> 00:44:04,400
Speaker 2: stuck at like four point five percent is an interesting one.

851
00:44:04,960 --> 00:44:07,520
Speaker 2: People I think tend to think of higher productivity as

852
00:44:07,520 --> 00:44:11,359
Speaker 2: a good thing. Yeah, obvious reasons, but you know, there's

853
00:44:11,400 --> 00:44:16,480
Speaker 2: so much political nervousness at the moment about jobs and

854
00:44:16,719 --> 00:44:20,600
Speaker 2: economic security. If we have a massive productivity boost that

855
00:44:20,760 --> 00:44:24,920
Speaker 2: ends with people not having as many good jobs, that'll

856
00:44:24,920 --> 00:44:25,520
Speaker 2: be interesting.

857
00:44:25,840 --> 00:44:28,799
Speaker 4: I mean, I still think it's a huge question mark obviously,

858
00:44:28,840 --> 00:44:31,680
Speaker 4: like what AI ultimately means for the labor market. But

859
00:44:31,800 --> 00:44:35,000
Speaker 4: this idea that like it could raise the frictional unemployment

860
00:44:35,080 --> 00:44:38,319
Speaker 4: so not necessarily sustained change the number of people who

861
00:44:38,360 --> 00:44:40,600
Speaker 4: have jobs, but the time it takes don't find a

862
00:44:40,719 --> 00:44:43,920
Speaker 4: job in various other things because it's just so economy wide.

863
00:44:44,120 --> 00:44:46,239
Speaker 4: Is like, maybe that's a useful I think that's a

864
00:44:46,320 --> 00:44:48,160
Speaker 4: useful way to think about the question, at least in

865
00:44:48,200 --> 00:44:49,239
Speaker 4: the short and medium term.

866
00:44:49,360 --> 00:44:50,840
Speaker 2: Yeah, all right, shall we leave it there.

867
00:44:50,920 --> 00:44:51,520
Speaker 3: Let's leave it there.

868
00:44:51,640 --> 00:44:54,080
Speaker 2: This has been another episode of the All Thoughts podcast.

869
00:44:54,200 --> 00:44:57,480
Speaker 2: I'm Tracy Alloway. You can follow me at Tracy Alloway.

870
00:44:57,200 --> 00:44:59,920
Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart.

871
00:45:00,160 --> 00:45:03,520
Speaker 4: Follow our producers Carmen Rodriguez at Carmen armand Dashil Bennett

872
00:45:03,520 --> 00:45:04,640
Speaker 4: a Dashbot and kill.

873
00:45:04,560 --> 00:45:05,680
Speaker 3: Brooks at Killbrooks.

874
00:45:05,920 --> 00:45:08,440
Speaker 4: More Odd Lots content, go to Bloomberg dot com slash

875
00:45:08,440 --> 00:45:11,120
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876
00:45:11,320 --> 00:45:13,200
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877
00:45:13,239 --> 00:45:17,439
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878
00:45:17,480 --> 00:45:18,080
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879
00:45:17,920 --> 00:45:19,799
Speaker 2: You enjoy odd Lots, if you want us to have

880
00:45:19,960 --> 00:45:22,520
Speaker 2: Yan and Ben in next year to check on their

881
00:45:22,560 --> 00:45:25,680
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