WEBVTT - Trade Could Derail It All, Pearl Says 0:00:00.080 --> 0:00:12.640 Yeah, Welcome to the Bloomberg Surveillance Podcast and I'm Tom 0:00:12.720 --> 0:00:15.720 Keene Jai Ley. We bring you insight from the best 0:00:15.800 --> 0:00:21.240 in economics, finance, investment, and international relations. Find Bloomberg Surveillance 0:00:21.280 --> 0:00:25.720 on Apple Podcasts, SoundCloud, Bloomberg dot Com, and of course 0:00:26.040 --> 0:00:36.239 on the Bloomberg It's one security, it's one number, the 0:00:36.320 --> 0:00:39.800 ten year tracery and three percent. Just what is so important? 0:00:39.840 --> 0:00:43.120 If there's anything important at all about a psychological line 0:00:43.120 --> 0:00:44.959 in the sand that hasn't been crossed in more than 0:00:45.080 --> 0:00:47.800 four years, we can bring in now Carl Weinberg, high 0:00:47.840 --> 0:00:51.040 frequency Economics founder who joins us in New York. Car 0:00:51.320 --> 0:00:55.680 important or not important at all? Oh, it's it's psychologically important, 0:00:55.680 --> 0:00:58.440 I think. But I'm hard pressed to argue that the 0:00:58.760 --> 0:01:01.720 gentle rise we're seeing in bond yields over time is 0:01:01.760 --> 0:01:04.720 really making a breaking force on the economy. With inflation 0:01:05.120 --> 0:01:07.399 sizing up to be around I don't know, two and 0:01:07.400 --> 0:01:09.520 a half percent or thereabouts, you're looking at half a 0:01:09.560 --> 0:01:12.480 percent real rate of interest on ten year bonds. That's 0:01:12.760 --> 0:01:15.119 not going to do the job that the Fed has 0:01:15.160 --> 0:01:17.520 to do of slowing the rate of growth of jobs 0:01:17.520 --> 0:01:20.040 in the economy. Carl would you describe this as grant 0:01:20.040 --> 0:01:22.160 you Although we were close to two percent just back 0:01:22.160 --> 0:01:25.440 in September the two year no that yields doubled in 0:01:25.440 --> 0:01:27.360 in less than a year. We've had a real real 0:01:27.440 --> 0:01:29.800 re price across the curve over the last six to 0:01:29.880 --> 0:01:32.160 nine months. Yeah, I see, I see what you're saying. 0:01:32.160 --> 0:01:34.240 And for markets, is a good bit of volatility in 0:01:34.600 --> 0:01:36.480 there that we haven't seen in a long time. And 0:01:36.480 --> 0:01:39.520 that's certainly an issue for the markets. But speaking as 0:01:39.520 --> 0:01:42.960 an economist, which unfortunately is the limit of my abilities, 0:01:43.480 --> 0:01:47.120 we're looking at really long term yields that still have 0:01:47.240 --> 0:01:50.240 to go higher in order to break the economy. What's 0:01:50.240 --> 0:01:52.760 more important at the moment, Carl, as far as you're 0:01:52.760 --> 0:01:55.320 concerned in terms of what's happening with the debt market. 0:01:55.480 --> 0:01:57.280 Is it the supply the amount of debt issuance we 0:01:57.320 --> 0:01:59.640 get even more through this week as well? Is it 0:01:59.680 --> 0:02:02.080 a cross spective inflations down into bubble away the price 0:02:02.160 --> 0:02:05.160 pressure finally started to come through. Is it something else? 0:02:05.240 --> 0:02:07.440 What is it? Well, it's yes and yes the both 0:02:07.480 --> 0:02:09.960 of those questions. I mean, the market should be thinking 0:02:10.000 --> 0:02:13.440 about inflation risks. It's it's not here now, But the 0:02:13.560 --> 0:02:16.520 laws of supply and demand haven't been repealed. The labor 0:02:16.600 --> 0:02:19.640 market keeps on getting tighter, and is by colleague Jim 0:02:19.680 --> 0:02:22.960 O'Sullivan suggests, unless the labor market stops getting tighter, it's 0:02:23.000 --> 0:02:25.280 going to reach a point where it is going to 0:02:25.760 --> 0:02:29.320 trigger some wage pressure. And as far as supply is concerned, 0:02:29.360 --> 0:02:31.680 while we've all been reading about the the US deficit 0:02:31.800 --> 0:02:34.320 and the impact that the tax cuts on it, that's 0:02:34.360 --> 0:02:36.480 got to be weighing very heavily on the market, especially 0:02:36.520 --> 0:02:38.400 at an auction time like this. Well, much of that 0:02:38.480 --> 0:02:40.919 issuance has come at the front end so far. Colm, 0:02:41.000 --> 0:02:42.880 I guess my question to you is, at what point 0:02:42.919 --> 0:02:46.079 do you start to consider these yields as sort of 0:02:46.120 --> 0:02:48.840 a restriction against the general economy. You say, not now, 0:02:49.040 --> 0:02:51.840 but looking at where short term interest rates, that's got 0:02:51.880 --> 0:02:54.040 to take a fight at some point, Yes, at some 0:02:54.160 --> 0:02:57.679 point it does. Right now, though, the indications that that 0:02:58.120 --> 0:03:00.160 we're looking at and that the Feder looking at, just 0:03:00.400 --> 0:03:03.040 that it's not biting very much. We're seeing the sentiment 0:03:03.120 --> 0:03:07.440 in disease looking quite positive. We're seeing the Fed remarking 0:03:07.480 --> 0:03:10.280 that financial conditions are still quite easy, with the stock 0:03:10.360 --> 0:03:14.480 market being so strong, so profits being good, so overall, 0:03:14.560 --> 0:03:17.440 it doesn't seem to be biting just yet. How do 0:03:17.600 --> 0:03:23.560 guys like you draw fiscal debt and deficit economics into 0:03:23.600 --> 0:03:27.600 all your monetary and international swirl. Where does it fit 0:03:27.680 --> 0:03:32.000 in algebraically, where does it fit in geometrically, or just 0:03:32.120 --> 0:03:35.000 simply where's it fit in in reality? Well? I think 0:03:35.160 --> 0:03:38.280 reality is the easiest place to put it, because as 0:03:38.360 --> 0:03:41.240 economists you have to have a free floating anxiety about 0:03:41.320 --> 0:03:43.680 this business of running up the fiscal deficit at a 0:03:43.760 --> 0:03:46.920 time when the economy is so tight, stimulating the economy, 0:03:47.000 --> 0:03:51.320 when labor is already in scarce supply relative to demand, 0:03:51.720 --> 0:03:54.400 of pushing an economy that's arguably at the peak of 0:03:54.480 --> 0:03:56.440 its business cycle. That's what the I m F told 0:03:56.480 --> 0:03:58.680 this this weekend. That's what jam O. Sullivan is telling 0:03:58.760 --> 0:04:01.400 us in his high frequency e CAN mixed notes. Um. So, 0:04:01.720 --> 0:04:04.800 the overall the question is not so much what happens 0:04:04.960 --> 0:04:08.200 right now, but what's going to happen when the cycle turns? 0:04:08.320 --> 0:04:11.400 And that's inevitable. You nailed the thing here, Carl, is 0:04:11.520 --> 0:04:14.240 we take the net present value of what we think 0:04:14.360 --> 0:04:17.440 is going to happen to debt and deficit out there, 0:04:17.880 --> 0:04:20.280 and we pull it back to the present to the 0:04:20.440 --> 0:04:24.640 current chronic trillion dollar deficits plural of the United States 0:04:24.720 --> 0:04:28.720 of America create a present moment of angst or not. 0:04:29.440 --> 0:04:32.400 I think at this point they create concern about angst 0:04:32.520 --> 0:04:35.080 rather than angst itself. But you know what they say, 0:04:35.440 --> 0:04:37.880 the fear of dying is worse than itself. You know 0:04:37.960 --> 0:04:43.600 that's NIGI. That was way too excessential. Help me, Jo. 0:04:43.800 --> 0:04:45.880 There was a fantastic time EF report and I'm sure 0:04:45.920 --> 0:04:47.520 you guys discussed it when I was a wife from 0:04:47.520 --> 0:04:50.120 the studio. I lost weight Tom and within this report, 0:04:50.200 --> 0:04:52.280 Oh you weren't here. I wasn't here. Did you miss me? 0:04:55.720 --> 0:04:58.760 Were you interviewing with Arsenal? I was interviewing with Arsenal 0:04:59.000 --> 0:05:01.960 for Vengus Jol. I was in North London. I thought 0:05:02.000 --> 0:05:03.800 it was winder. I got in trouble. Did you get 0:05:03.839 --> 0:05:06.560 in trouble? I imagine you're going in trouble for saying 0:05:06.640 --> 0:05:09.479 that and a few other things as well, Um, Carl Weinberg. 0:05:09.520 --> 0:05:12.880 Within this IMF report just showed where debt to GDP 0:05:13.080 --> 0:05:15.080 ratios are going to be over the next five years 0:05:15.160 --> 0:05:18.200 for the world developed economies and standing alone with the 0:05:18.279 --> 0:05:20.800 United States, it was the only debt to GDP ratio 0:05:21.200 --> 0:05:25.719 that the IMF forecasts to increase over the next five years. 0:05:25.839 --> 0:05:28.560 How significant is that, Carl, I'd share the I m 0:05:28.680 --> 0:05:30.720 F is concerned that the US that the g d 0:05:30.839 --> 0:05:33.680 P is going to rise. It seems to be affordable 0:05:33.839 --> 0:05:36.880 right now in good times, there's lots of savings out there. 0:05:37.120 --> 0:05:40.040 But if the business cycle turns sour, it's going to 0:05:40.120 --> 0:05:43.640 become more difficult to finance. So I think the risks 0:05:43.640 --> 0:05:45.120 are clear, and the I m F has done a 0:05:45.160 --> 0:05:47.000 good job of seating them just looking at some of 0:05:47.040 --> 0:05:49.080 the risks now though, and as far as the next 0:05:49.120 --> 0:05:52.480 downturn is potentially concerned, Carl, I see the United States 0:05:52.880 --> 0:05:56.960 and its fiscal position increasingly exhausted before the next downturn. 0:05:57.320 --> 0:06:00.360 And I see the Europeans, the euro Zone in the 0:06:00.400 --> 0:06:04.400 European Central Bank increasingly exhausting their monetary policy options before 0:06:04.440 --> 0:06:06.920 we reach the next downturn as well. Out of those 0:06:07.040 --> 0:06:10.559 two situations, an exhausted fiscal position in the United States, 0:06:10.880 --> 0:06:14.560 an exhausted monetary policy position in Europe going into the 0:06:14.680 --> 0:06:18.200 latter years of this cycle. What are you more concerned 0:06:18.200 --> 0:06:21.040 about Europe the United States? Well, I think that in 0:06:21.200 --> 0:06:26.400 Europe sluggish economic growth and subpart economic growth isn't news, alright, 0:06:26.680 --> 0:06:32.400 it's yours become accustomed to underperforming in terms of historical standards. 0:06:32.680 --> 0:06:33.880 We've had a little bit of a blip in the 0:06:34.000 --> 0:06:37.440 last few quarters, but net net GDP growth has been 0:06:37.760 --> 0:06:40.159 rather slow. I think a slowdown in the United States 0:06:40.320 --> 0:06:42.240 from the point where we are right now, from this 0:06:42.520 --> 0:06:46.000 overheated condition that we're moving into after this fiscal stereo. 0:06:48.360 --> 0:06:51.040 We're assuming in Jim's forecast that the U. S economy 0:06:51.320 --> 0:06:53.800 is going to get a blip from the tax cuts 0:06:54.160 --> 0:06:56.720 that we've seen and from this regulations that that that 0:06:56.880 --> 0:06:59.200 that expires in the new year. You see, the thing 0:06:59.200 --> 0:07:01.880 about fiscal policy is you have to keep on increasing 0:07:01.920 --> 0:07:04.320 it just to keep it steady. You have to spend 0:07:04.400 --> 0:07:06.080 more and more each year in order to keep the 0:07:06.160 --> 0:07:09.680 same impact on growth. And once this blip goes through, 0:07:10.000 --> 0:07:11.760 the growth is going to go back down ten yor 0:07:11.840 --> 0:07:14.240 yield three percent. Just in your head, car with your 0:07:14.280 --> 0:07:18.960 decades of experience, at what tenure yield do we go? Oh, 0:07:19.840 --> 0:07:23.560 there's just a psychic there's that glimmer that shift. Are 0:07:23.600 --> 0:07:25.840 we close to that or is it distant like four 0:07:25.920 --> 0:07:28.560 or five from another time? And place. Yeah, well, I 0:07:28.600 --> 0:07:31.840 think Jim and I have maybe slightly different views on 0:07:31.920 --> 0:07:34.320 all of this, But speaking for myself, I look at 0:07:34.320 --> 0:07:36.960 about a hundred points above inflation as being a level 0:07:37.080 --> 0:07:39.680 that is a breaking level for a long term yield. 0:07:39.720 --> 0:07:41.520 So if inflation is going to run a two to 0:07:41.640 --> 0:07:43.880 three percent, then we could see long term yields in 0:07:43.920 --> 0:07:46.280 the three to four percent, which is being still neutral. 0:07:46.720 --> 0:07:49.080 Carol Weinberg, thank you so much. I freaking say economics. 0:07:49.160 --> 0:07:51.680 Just really good to get. Great person, John. It was 0:07:51.720 --> 0:07:54.960 great to have Dr Weinberg on the set with David 0:07:55.040 --> 0:07:58.800 Pearl of Epic Investments, like two different worlds. Just this 0:07:58.920 --> 0:08:16.160 world class character with us right now. For those of 0:08:16.200 --> 0:08:19.280 you on Global Wall Street, for those of you grinding 0:08:19.440 --> 0:08:22.840 away for the c f A exam usually June one 0:08:23.040 --> 0:08:26.160 dish and this year later, this is a clinic of 0:08:26.200 --> 0:08:30.320 the morning. David Pearl it Epic Investments where they manage money. 0:08:30.400 --> 0:08:34.079 He and Bill priests Um are basically iconic on the 0:08:34.240 --> 0:08:36.880 study of free cash David Pearl, what do we get 0:08:37.000 --> 0:08:39.640 most wrong about free cash flow? When you see c 0:08:39.880 --> 0:08:42.360 f A s or NBA's blather on about it, What 0:08:42.520 --> 0:08:45.880 do they most get wrong? Well, first, the concept of 0:08:45.960 --> 0:08:48.000 free cash flow is you know, everyone is used to 0:08:48.120 --> 0:08:50.600 this idea of earnings, but earnings are an accounting measure. 0:08:51.040 --> 0:08:53.439 It's not like a law of physics. It's not immutable. 0:08:53.480 --> 0:08:56.320 It's a game like baseball. If everyone plays by the rules, 0:08:56.679 --> 0:08:59.200 you can compare company A to company B. No one 0:08:59.280 --> 0:09:03.880 plays by the rules anymore. Companies use ProForma earnings, estimated earnings. 0:09:04.080 --> 0:09:07.040 We call it earnings before expenses. They do whatever they want. 0:09:07.160 --> 0:09:09.640 You can't even compare this year to last year in 0:09:09.679 --> 0:09:13.400 most companies. Whereas cash is real, that's how you run 0:09:13.440 --> 0:09:17.360 a business, and generating cash is how you grow a business. 0:09:17.400 --> 0:09:20.560 That's how you pay for new people, build a factory. 0:09:20.720 --> 0:09:24.199 Then what do you see among the technology people. When 0:09:24.240 --> 0:09:27.040 you hear people say, oh, the social media guys and 0:09:27.120 --> 0:09:30.400 technology guys, they think they play by a different playbook. 0:09:30.720 --> 0:09:34.199 But does Amazon is one example, generate a lot of 0:09:34.240 --> 0:09:38.199 free cash flow? Yeah? So Amazon only generates cash in 0:09:38.360 --> 0:09:40.839 two areas that we can really see, which is the 0:09:40.960 --> 0:09:44.400 cloud and uh, you know that's under intense competition, but 0:09:44.480 --> 0:09:47.640 a great business and third party fulfillment where they don't 0:09:47.679 --> 0:09:50.160 own any of the inventory, they just mail it to you. 0:09:50.760 --> 0:09:53.600 So otherwise their free cash flow is pretty negative. Their 0:09:53.720 --> 0:09:57.079 profit margins are actually lower than Whole Foods, which was 0:09:57.160 --> 0:10:01.320 a you know, not successful food retailer. So the answer 0:10:01.480 --> 0:10:04.760 is no. And the point about um Wall Street is 0:10:05.120 --> 0:10:08.320 some companies just get rewarded for growth, and Amazon's one 0:10:08.360 --> 0:10:11.120 of those, and as long as they can grow faster 0:10:11.280 --> 0:10:14.120 than expectation, it goes up and no one seems to 0:10:14.240 --> 0:10:17.120 care about profits. You know, Netflix is the other major 0:10:17.400 --> 0:10:21.000 fang company where growth is very, very high, and frankly, 0:10:21.080 --> 0:10:24.240 they're losing about three billion dollars on let's say sixteen 0:10:24.360 --> 0:10:27.559 billion of sales. That's just not good and it doesn't 0:10:27.600 --> 0:10:29.400 look like that's going to change. It's actually going to 0:10:29.440 --> 0:10:32.640 accelerate that laws. So Netflix a company with high cash burn, 0:10:32.840 --> 0:10:35.520 Tesla another big company we all know of with high 0:10:35.559 --> 0:10:39.199 cash burn. What's the catalyst for change and changing the 0:10:39.200 --> 0:10:42.360 way investors perceived these companies as to what is successful 0:10:42.400 --> 0:10:46.160 and what isn't. Is it high rates um At some 0:10:46.360 --> 0:10:48.960 point for Netflix and Tesla will be because they are 0:10:49.040 --> 0:10:51.679 running out of money. I mean, Netflix will have to 0:10:51.760 --> 0:10:54.319 raise money in six months to nine months at the 0:10:54.440 --> 0:10:57.240 rate of cash burn. And Tesla has the same issue 0:10:57.280 --> 0:10:59.400 where now you know they're debt is trading at eighty 0:10:59.440 --> 0:11:01.920 five to nine d cents on the dollar, and they're 0:11:01.920 --> 0:11:04.480 paying five percent, and as rates go up, this becomes 0:11:04.960 --> 0:11:08.760 a ownerous task to keep financing a company that's going 0:11:08.840 --> 0:11:11.840 to continue to lose money. Amazon is sort of self funding, 0:11:12.080 --> 0:11:15.280 God bless them. They also have something that's unusual in accounting. 0:11:15.360 --> 0:11:18.880 It's negative working capital because we all pay them up 0:11:18.960 --> 0:11:21.320 front when we buy something, and they pay their vendors 0:11:21.400 --> 0:11:24.160 whenever they feel like it, so they get an instant loan. 0:11:24.760 --> 0:11:27.439 So anyway, for a lot of these companies, there is 0:11:27.480 --> 0:11:30.760 a huge difference between earnings and free cash flow. Netflix 0:11:30.840 --> 0:11:34.640 earned sixty cents this quarter and lost three d million dollars. 0:11:35.200 --> 0:11:38.600 Is your research or are the opportunities rather, I should say, 0:11:39.120 --> 0:11:42.720 in mid cap and small cap or there's the free 0:11:42.760 --> 0:11:46.640 casual arbitrage if you will, in the bigger companies. Uh, 0:11:47.000 --> 0:11:49.439 It is actually both. It depends on your point in 0:11:49.559 --> 0:11:54.079 your uh your capital expense cycle. So for industrials like 0:11:54.320 --> 0:11:58.160 Boeing or even smaller companies or cable companies, if you 0:11:58.320 --> 0:12:01.360 spent ten years egging holes in the ground, if you're 0:12:01.360 --> 0:12:04.199 a cable company, you're Boeing developing the seven eight seven, 0:12:04.720 --> 0:12:07.120 you are at the point right now where you're starting 0:12:07.200 --> 0:12:10.520 to make money like crazy. So Boeing is now selling 0:12:10.559 --> 0:12:14.200 an airplane at you know, three million dollars. They are 0:12:14.280 --> 0:12:18.160 getting cash, but they have all this non cash amortization 0:12:18.240 --> 0:12:21.880 and depreciation built in, so their free cash flow per 0:12:22.000 --> 0:12:24.440 share is higher than their earnings per share, and it's 0:12:24.480 --> 0:12:27.439 going to be accelerating that gap. So Boeing looks a 0:12:27.559 --> 0:12:30.560 lot cheaper on free cash flow than it does on earnings. Now, 0:12:30.760 --> 0:12:34.240 what's your enthusiasm? Just one final question, what's your enthusiasm 0:12:34.880 --> 0:12:37.319 on the market. I mean you're walking in to the 0:12:37.360 --> 0:12:40.360 acclaimed investments and saying, let's put it to work, let's go, 0:12:40.480 --> 0:12:42.880 go go. So if you're if you really are an 0:12:42.960 --> 0:12:46.200 analyst they bottom up stock picker, you're feeling good because 0:12:46.280 --> 0:12:49.199 most companies are having a great year and it's probably 0:12:49.240 --> 0:12:52.280 going to continue because of tax reform with lower tax rates, 0:12:52.320 --> 0:12:56.480 repatriation of cash if you're Microsoft or Google. But the 0:12:56.600 --> 0:12:59.079 macro is the scary part. The big one on the 0:12:59.120 --> 0:13:01.959 horizon is trade, which has been talked about every day 0:13:02.000 --> 0:13:04.840 and today you know a little more favorably. Trade could 0:13:04.880 --> 0:13:09.000 derail it all. So with a proviso, were bullish. David Pearl, 0:13:09.040 --> 0:13:11.760 thank you so much. With Epic Investments. Uh, this morning, 0:13:24.480 --> 0:13:27.640 Tom Percelly with us with RBC Capital Markets have been 0:13:27.640 --> 0:13:31.320 talking wage dynamics, of which he is especially good. Tom. 0:13:31.360 --> 0:13:35.880 I want to really focus here on investment by corporations. 0:13:35.920 --> 0:13:39.199 We've got a tax cut, We've got this that we 0:13:39.360 --> 0:13:43.160 just hit on David Pearl with Epic Investments, their legendary 0:13:43.280 --> 0:13:47.000 and free cash flow analysis. Are they putting any of 0:13:47.080 --> 0:13:51.200 that money to work actually like investing in American hardware? 0:13:51.840 --> 0:13:56.120 You know? So I love this question. Um. I would 0:13:56.160 --> 0:13:58.400 tell you that I think the pieces are are in 0:13:58.600 --> 0:14:02.080 police for that to happen. Um. Whether it actually happens 0:14:02.360 --> 0:14:04.560 is a slightly different story. But but let me let 0:14:04.640 --> 0:14:06.800 me let me give you something to think about. Um So, 0:14:07.040 --> 0:14:10.800 for starters, if you look at lending standards for commercial 0:14:10.840 --> 0:14:14.520 and industrial loans, um, they have eased, and that has 0:14:14.520 --> 0:14:17.360 been true now for a number of quarters, and that 0:14:17.480 --> 0:14:20.320 tends to lead actual lending. UM. So I would tell 0:14:20.320 --> 0:14:22.360 you that's that sort of piece one here. Here, here's 0:14:22.360 --> 0:14:24.760 the other thing to think about. I'm not a U. 0:14:25.240 --> 0:14:27.480 You know people talking about this idea of animal spirits, right, 0:14:27.520 --> 0:14:31.440 I mean you're you're you've obviously talked about those countless times. 0:14:31.920 --> 0:14:33.600 I have a hard time really sort of embracing the 0:14:33.680 --> 0:14:36.520 notion of animal spirits because I can't I can't touch it, um. 0:14:36.560 --> 0:14:38.120 And because I can't touch it, it's hard for me 0:14:38.160 --> 0:14:40.280 to sort of model that. UM. But I've I've sort 0:14:40.320 --> 0:14:42.480 of come to religion on this idea a little at 0:14:42.560 --> 0:14:45.280 least a little bit recently. I've I've done a bunch 0:14:45.320 --> 0:14:48.360 of corporate board meetings, UM, you know, just to sort 0:14:48.360 --> 0:14:49.960 of give them my view on what's happening from an 0:14:50.000 --> 0:14:54.080 economic perspective. UM. And when I go in, I've I've 0:14:54.120 --> 0:14:58.880 been struck by UM how uh. You know, elated is 0:14:58.920 --> 0:15:01.440 maybe too strong of a war heard, but there's a genuine, 0:15:01.480 --> 0:15:05.280 a genuine sense of UM, positive vibe coming from the 0:15:05.360 --> 0:15:09.440 idea that we have lower, lower corporate taxes, regulation might 0:15:09.480 --> 0:15:12.000 be scaled back. And what's interesting is I don't know 0:15:12.120 --> 0:15:14.560 how to model it, but I know what I'm seeing, 0:15:14.760 --> 0:15:18.480 and I'm seeing this sort of generally better attitude towards 0:15:18.520 --> 0:15:20.800 the backdrop, and I get it. You know, when we 0:15:20.880 --> 0:15:23.280 talk about repatriation, we all talked about it in terms of, 0:15:23.560 --> 0:15:25.400 you know, companies are going to use it for buybacks. 0:15:25.800 --> 0:15:28.880 Dippen ends. Um, I just think you know what I've 0:15:28.920 --> 0:15:31.080 been seeing recently, I would tell you, and given the 0:15:31.160 --> 0:15:33.960 fact that fundamentally you've had this improved in living standards, 0:15:34.200 --> 0:15:35.880 I wouldn't be the least bit surprise of something that 0:15:35.920 --> 0:15:39.480 gets siphoned off and use for capex. Okay, I agree 0:15:39.560 --> 0:15:41.760 with all that, but I still don't understand how a 0:15:41.840 --> 0:15:45.880 corporate officer or CFO does a net present value analysis 0:15:46.320 --> 0:15:49.000 with the real rates the fiction that they are do 0:15:49.120 --> 0:15:53.600 you are we anywhere near where a responsible financial executive 0:15:53.920 --> 0:15:57.600 can actually do the math that they learned in school. Yeah, Well, 0:15:57.680 --> 0:15:59.480 here's the thing, and here's part of the here's part 0:15:59.520 --> 0:16:02.000 of that math, the equation. I think people forget where 0:16:02.080 --> 0:16:05.120 cash flow is doing because it's true that if if 0:16:05.200 --> 0:16:07.840 you know, the net present value of of of anything 0:16:08.040 --> 0:16:11.120 is going to deteriorate if we simply rise, that's true, 0:16:11.200 --> 0:16:14.600 that's always true. But what if cash flows increase? Yeah, 0:16:14.920 --> 0:16:17.760 then if your rate rises, then you're left with the 0:16:17.800 --> 0:16:20.880 same net present value. And I think I think none 0:16:20.920 --> 0:16:23.160 of the stuff exists in a vacuum, and everyone wanted to, 0:16:23.320 --> 0:16:25.720 but that is simply not the way that the match. Well, 0:16:25.920 --> 0:16:28.400 but the FED, the FED exists in a vacuum, which is, 0:16:28.440 --> 0:16:32.520 by definition they have to be reactive given the data. Carney, 0:16:32.800 --> 0:16:37.800 Draggy and the others clearly are waiting and waiting for inflation. 0:16:38.480 --> 0:16:42.120 We're different. I'm told we are going to see inflation. 0:16:42.840 --> 0:16:45.560 Our audience says they see it in Cleveland, CPI and 0:16:45.680 --> 0:16:48.920 some of the more service sector laden indicase. But is 0:16:48.960 --> 0:16:54.920 the inflation there for Powell Act. It's enough for them 0:16:55.000 --> 0:16:57.400 to act in the way that we expect them to write, 0:16:57.400 --> 0:16:59.800 which is to say, seven more hikes between now the 0:17:00.040 --> 0:17:04.359 of nineteen. Are thinking, I get much more aggressive than that. UM. Again, 0:17:04.400 --> 0:17:05.920 I think you know we've sort of were cut short 0:17:05.920 --> 0:17:07.879 a little bit earlier. UM, And so it won't be 0:17:08.000 --> 0:17:11.080 labor that at this point on a Monday you can 0:17:11.160 --> 0:17:14.520 do that. But I think that there's a really sound 0:17:14.640 --> 0:17:17.720 argument for not only our base case to come to fruition, 0:17:18.000 --> 0:17:21.439 but even a slightly more aggressive fed than that. UM. 0:17:21.640 --> 0:17:23.760 If this idea of that the consumer and I'll just 0:17:23.800 --> 0:17:25.360 pick up on the thread that I left out there 0:17:25.600 --> 0:17:29.040 in the first segment. If this idea that the consumer 0:17:29.160 --> 0:17:30.520 is now all of a sudden going to start to 0:17:30.560 --> 0:17:34.399 feel a little bit more emboldened to take on more credit, UM, 0:17:34.560 --> 0:17:37.600 that's a that's a that that's a that will goose 0:17:37.680 --> 0:17:40.720 up consumption um. And in the that scenario, again, all 0:17:40.800 --> 0:17:42.760 in the context of what we take even before that, 0:17:43.040 --> 0:17:46.000 this idea that wage pressure is a building. Um. Yeah, 0:17:46.040 --> 0:17:47.879 I think that there's a real sound argument for the 0:17:47.920 --> 0:17:49.920 FED to be a bit more aggressive, but again that 0:17:50.040 --> 0:17:51.680 that that's not our base case. Our base case is 0:17:51.680 --> 0:17:53.359 that the FED will go seven more times from now 0:17:53.400 --> 0:17:55.760 in nineteen at the end of nineteen UM and and 0:17:56.200 --> 0:17:59.399 I don't know that you can expect, uh, materially more 0:17:59.440 --> 0:18:04.679 aggressive than that. What GDP is linked to your seven 0:18:05.040 --> 0:18:11.360 rate hunts. Roughly, it's make American great. And the president 0:18:11.400 --> 0:18:14.639 has succeeded without question, you can say the presidents has 0:18:14.680 --> 0:18:18.399 succeeded into the mid terms and frankly into the beginning 0:18:18.480 --> 0:18:21.680 of the presidential twenty twenty to deliver three percent g 0:18:21.840 --> 0:18:24.880 d P. You know, again, I'll leave that to other 0:18:24.920 --> 0:18:26.680 people to sort of figure out whether he did his 0:18:26.800 --> 0:18:29.000 job or or not. But the reality is we're going 0:18:29.040 --> 0:18:31.879 to get three percent growth UM. And you know, I 0:18:31.880 --> 0:18:34.240 don't I don't think that's particularly heroic. I mean, going 0:18:34.320 --> 0:18:36.639 into this year, we have two and a half percent 0:18:36.720 --> 0:18:38.760 as our base case uh. And then on the back 0:18:38.800 --> 0:18:40.959 of the tax cuts, um, we basically threw in an 0:18:41.000 --> 0:18:43.280 extra few tents three tenths to be exact, and then 0:18:43.280 --> 0:18:46.440 you get another tenth from from some CAPEX bill. So 0:18:46.520 --> 0:18:48.680 we're officially we are two point nine percent, so and 0:18:48.760 --> 0:18:51.280 round numbers three percent. So yeah, I mean, I think 0:18:51.320 --> 0:18:54.359 that's it again, low hurdle to get there, Okay, very quickly. 0:18:54.440 --> 0:18:56.200 One of the thought Tom perc and that is with 0:18:56.359 --> 0:18:59.640 all the time PERCELLI chat, I'm hearing it just assumes 0:18:59.720 --> 0:19:04.160 dal are stronger rates, up growth, up dollars stronger. It's 0:19:04.160 --> 0:19:07.320 not happening yet, does it happen? So what I would 0:19:07.359 --> 0:19:09.920 say is this, I think when you think about the dollar, 0:19:09.960 --> 0:19:11.280 I think what you have to keep in mind is 0:19:11.320 --> 0:19:13.200 you know which cross are you comparing it too. So 0:19:13.320 --> 0:19:16.160 let's just pick on europe um. And here's the reality 0:19:16.320 --> 0:19:22.080 behind europe Um. Europe is has stabilized and relative because 0:19:22.119 --> 0:19:23.360 this isn't the idea. I think a lot of people 0:19:23.400 --> 0:19:26.720 forget and relative to what we had been experiencing in Europe, 0:19:26.760 --> 0:19:29.160 which was, you know, sort of like people worrying about 0:19:29.160 --> 0:19:32.159 this worst case scenario. That is a major win from 0:19:32.200 --> 0:19:34.920 a European perspective. So I never thought that the dollar 0:19:35.000 --> 0:19:37.400 would really be able to sort of advance in any 0:19:37.520 --> 0:19:41.399 material way on the back of the relative improvement in Europe. 0:19:41.440 --> 0:19:43.800 I think that's a really important idea. So yeah, I 0:19:43.840 --> 0:19:46.159 think it's reasonably expect some dollar strength, but I I 0:19:46.640 --> 0:19:49.400 wouldn't get I wouldn't take that idea too far. Tim 0:19:49.400 --> 0:19:51.600 for Solly, thank you so much, greatly appreciate it all 0:19:52.080 --> 0:19:56.119 this morning, RBC Capital Markets and really original wage growth 0:19:56.200 --> 0:19:59.400 work about eighteen months maybe two years ago as well, 0:20:00.200 --> 0:20:18.680 Kitchos of Society General. We recalibrate before May first, Kit 0:20:18.880 --> 0:20:21.119 when does the dollar go up? The big shock in 0:20:21.240 --> 0:20:23.879 your world over the last number of weeks has been 0:20:24.040 --> 0:20:28.080 dollar weakness. Is this lift that we've seen tangible? Do 0:20:28.240 --> 0:20:32.919 we finally see reversal? Higher rates, better growth, stronger dollar? 0:20:33.080 --> 0:20:36.760 Is it for real? Uh, it's it's trying to be 0:20:36.840 --> 0:20:38.280 for real. We need to go a little bit further, 0:20:38.440 --> 0:20:41.440 and I think we need to get tenure notes decisively 0:20:41.520 --> 0:20:44.639 to hold through three in a way that doesn't cause 0:20:44.800 --> 0:20:47.120 you know, equity Marcus to go into retreat, the FED 0:20:47.200 --> 0:20:50.719 to start getting worried. Um. I think you know, if 0:20:50.720 --> 0:20:53.919 we're going to see the US get interest rates support again. Um, 0:20:53.960 --> 0:20:56.400 it's got to be, you know, a durable shift higher 0:20:56.440 --> 0:21:00.520 and expectations about West terminal fet funds are and right 0:21:00.560 --> 0:21:03.639 now I think we're doing enough to give heart to 0:21:03.760 --> 0:21:06.120 some dollar balls and to make some of the dollar bears. 0:21:06.160 --> 0:21:08.560 And that's the majority of the market, but pretty anxious. 0:21:09.119 --> 0:21:11.040 What I mean if it does reach if it does 0:21:11.119 --> 0:21:16.240 reach over three for the tenure, should you buy it treasuries? 0:21:16.359 --> 0:21:19.080 I would be quite tempted to buy some terms, if 0:21:19.200 --> 0:21:21.200 you know, once we settled down there, I would get 0:21:21.359 --> 0:21:24.600 very tempted if we started seeing volatility pickup and an 0:21:24.600 --> 0:21:27.320 equity market start to sell off because I don't think 0:21:27.359 --> 0:21:29.159 there's much inflation out there, and I don't think the 0:21:29.200 --> 0:21:32.520 FEDS changing its long term path reamb. What matters is 0:21:32.880 --> 0:21:34.920 is the FED going to start moving its estimate of 0:21:35.240 --> 0:21:37.320 our star of neutral real rates? So we're going to 0:21:37.400 --> 0:21:40.840