Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
Speaker 2: from our global headquarters in New York City. We are
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Speaker 2: am Eastern. Subscribe to the podcast on Apple, Spotify or
Speaker 2: anywhere else you listen, and as always on the Bloomberg
Speaker 2: Terminal and the Bloomberg Business App. Mohammad al Erin of
Speaker 2: Queens College, Cambridge staying focused on the bond market and
Speaker 2: writing some label twenty twenty four as US brink in
Speaker 2: the return of bond Vigilantes. This greater focus on debt
Speaker 2: and political stability is likely to continue into twenty five,
Speaker 2: as will the extent of dispersion between the United States,
Speaker 2: the Eurozone and Japan. Please to welcome a good friend
Speaker 2: of all of ours, Muhammad al Aerian Muhammad, Good morning,
Speaker 2: Good morning John, and a happy new year to years.
Speaker 2: The final Derby Concerts January tenth, So say it, oh there,
Speaker 2: Rose of Bloomberg Survivance Mohammed. Are the bond virgiliancies back
Speaker 2: and if so, what's changed? Why are they back?
Speaker 3: They're back because of three issues, as you know, John,
Speaker 3: One is consistently stronger than expected US economic data. Two
Speaker 3: is the understanding that inflation will be sticky, and three
Speaker 3: is as we needed focus now on debt and deficits.
Speaker 3: Put these three things together, the US leads a global
Speaker 3: bond sell off, and then what that sell off does.
Speaker 3: It picks vulnerabilities in the system and weaknesses, and it
Speaker 3: wouldn't have been good afternoon Britain. Would have just been
Speaker 3: afternoon Britain because they are facing the combination the emerging market,
Speaker 3: combination of higher yields and lower currency, which is really
Speaker 3: bad news for them right now.
Speaker 2: How much of that is in their own control.
Speaker 3: Some of it is in their own control, and it
Speaker 3: is a golden opportunity for this government to redouble or
Speaker 3: westart is economic approach, which has lost its way a
Speaker 3: little bit in the last few months. But they will
Speaker 3: be looking at the US jobs report and critically the
Speaker 3: CPI coming up. You know, it's not so long ago,
Speaker 3: Lisa that we used to say, okay, forget about CPI.
Speaker 3: Inflation's under control all that matters the jobs report. Now
Speaker 3: suddenly we've realized that both are in play, inflation and
Speaker 3: the employment spot.
Speaker 1: So when we say afternoon in Great Britain, because no
Speaker 1: one's saying it's particularly good right now, what is better
Speaker 1: for them an upside surprise to labor markets or downside
Speaker 1: surprise at a time when potentially that could spur some
Speaker 1: sort of risk off move, at a time when even
Speaker 1: in the United States people really questioning the sustainability of
Speaker 1: what's going on.
Speaker 3: Yeah, and that's the if in the US you really
Speaker 3: want an upside surprise, if we had the choice between
Speaker 3: the two, you take an upside surprise. If you're in Britain,
Speaker 3: you take a downside surprise. Yields have got to stabilize
Speaker 3: otherwise you're risk triggering these dynamics that can really hurt.
Speaker 3: So they would look, they would hope for a downside
Speaker 3: surprise that brings yields down here and puts down the
Speaker 3: pressure on their yields.
Speaker 1: When you talk about bond vigilantes and how they find
Speaker 1: the most vulnerable spots, how long is it before they
Speaker 1: find the United States particularly vulnerable? And this sort of
Speaker 1: goes to the heart of the question that Torsten Slock raised,
Speaker 1: which is, it is highly unusual to see the long
Speaker 1: end yield rise by one hundred basis points after a
Speaker 1: series of one hundred basist points are very cuts from
Speaker 1: the Federal Reserve. Do you have a sense that maybe
Speaker 1: the US is one of those vulnerable spots at this
Speaker 1: point in relative terms? No?
Speaker 3: You know, you've heard me say over and over again,
Speaker 3: the good, the bad, and the ugly. The good is
Speaker 3: the US, The baddest China, and the UK is Europe,
Speaker 3: including the UK. The ugly is Europe, including the UK.
Speaker 3: So US, China, Europe, including the UK. They'll focus on
Speaker 3: the ugly first and then they'll creed pop.
Speaker 4: The US has.
Speaker 3: A particularly a good spot because higher yields here associated
Speaker 3: with stronger growth. That is not the case in Europe.
Speaker 2: So why do you think the Federal Reserve is so confused?
Speaker 2: At least they sound confused by some on these conference
Speaker 2: back in December.
Speaker 3: How much time do we have?
Speaker 2: We've got enough time to get through it all.
Speaker 3: Okay, So they've been confusing their analysis, they've been confused
Speaker 3: in their communication, they've been confusing their approach. When you're
Speaker 3: data dependent and you're just looking at the future through
Speaker 3: the lens of the past. You will get more and
Speaker 3: more confused as we go through these changes. And we
Speaker 3: haven't even talked about policy uncertainty, which adds is the
Speaker 3: reality is right now we could solve at different levels
Speaker 3: of employment and inflation. Whatever scenario you had for recession,
Speaker 3: soft landing, no landing, whatever probabilities you had, now each
Speaker 3: of them is associated with different levels of inflation, and
Speaker 3: that is new. So the Fed, and you've heard me
Speaker 3: say this for a long time, has got to get
Speaker 3: more strategic in this approach and has has got to
Speaker 3: stop being excessively data dependent.
Speaker 2: They say this word, this phrase that you use policy uncertainty,
Speaker 2: and when I hear it, I just think Donald Trump.
Speaker 2: Well they actually mean to say it's Donald Trump. And
Speaker 2: you saw that in the minutes, and I think we
Speaker 2: heard that in the news conference with Chairman Poal. I'm
Speaker 2: struggling to understand this, and I'd love your opinion on this.
Speaker 2: Why some officials on the Federal Reserve are willing to
Speaker 2: preemp policy changes and factor that into their observations and
Speaker 2: their forecasts, but unwilling to do so. When it was
Speaker 2: Biden in the White House and he was pushing through
Speaker 2: massive fiscal stimulus into a supply constrained economy, and they
Speaker 2: sat there and let inflation rip. What explains the difference
Speaker 2: between the behavior and response and the approach to two
Speaker 2: different presidents.
Speaker 3: No, you've got to ask them. We thought we understood
Speaker 3: what the FED. How the FED approached this when Chapau said,
Speaker 3: quote something along lines that we don't speculate, we don't predict,
Speaker 3: and we don't assume anything about policies. So everybody assumed,
Speaker 3: you know what, let's wait and see and what we're
Speaker 3: hearing from the FED does not incorporate forecasts about policy changes.
Speaker 3: And then the whole thing got modeled, and now some do,
Speaker 3: some don't.
Speaker 4: You're not quite sure what.
Speaker 3: And I think this is part of a bigger issue,
Speaker 3: which is FED communication has gotten really confused. Bill Dudley
Speaker 3: had a really good piece in Rumor Opinion about this.
Speaker 3: And it does matter because the FED is supposed to
Speaker 3: reduce volatility, not contribute to volatility, and for the last
Speaker 3: few years the FED has contributed to volatility.
Speaker 1: How do they not contribute to volatility when they are
Speaker 1: facing off with policies that offer up profoundly different contours
Speaker 1: of inflation and growth?
Speaker 3: So first of all, they've got to either take the
Speaker 3: approach of this is what we think the baseline is,
Speaker 3: we are gonna check it every single day against more
Speaker 3: signs out of DC. Alternatively, we're not incorporating any new policies.
Speaker 3: Sometimes you need a top down, you need the chair
Speaker 3: to say this is the approach we're going to take
Speaker 3: for now, because the muddled middle causes all sorts of
Speaker 3: spillover effects that are not helpful at all to them.
Speaker 1: So let's talk about the spillover effects. We've talked before
Speaker 1: about how their at risk of maybe allowing inflation to
Speaker 1: creep higher than have to hike rates later, the idea
Speaker 1: of not recognizing inflation enough. There's the other side of things.
Speaker 1: If they hold rates too high for too long, they
Speaker 1: could cause a deterioration and dramatic iteration in the economy
Speaker 1: right now, which is the bigger risk.
Speaker 3: So the only reason we talk about the inflation risk
Speaker 3: is because we compare it to an arbitrary target that
Speaker 3: I'm willing to bet if we were to set today,
Speaker 3: we would not set at two percent. We'd set at
Speaker 3: two and a half to three. Every other indication of
Speaker 3: inflation suggested inflation expectations are stable. It just was structurally
Speaker 3: happening here and in the rest of the world, means
Speaker 3: that you're going to run the economy for now at
Speaker 3: a higher equilibrium inflation rate than before, and it's not.
Speaker 4: So.
Speaker 3: The reason why we're getting in this whole thing is
Speaker 3: because we are judging ourselves against a target that itself
Speaker 3: is not only arbitrary, but would not have been the
Speaker 3: target we would have chosen today. I don't worry, honestly
Speaker 3: about inflation until I have evidence that inflation expectations are
Speaker 3: the anchored, and there's no evidence of that at all.
Speaker 3: I do worry that if the FED truly believes that
Speaker 3: it has to achieve two percent and wants to do it,
Speaker 3: it's going to have to hike rates this year. And
Speaker 3: if it hikes races this year, it's going to pull
Speaker 3: the rug from under US growth. It's going to pull
Speaker 3: the work from under US investment. This is how important
Speaker 3: it is. So my expectation is that fudge they'll say,
Speaker 3: we continue to pursue two percent, but down the road
Speaker 3: they'll stick with a two and a half percent target
Speaker 3: forecast for now, saying on the way to two percent,
Speaker 3: but we will basically be living with a high inflation target.
Speaker 2: Mohammed, We're lucky to have you. I'm Marie joins Us
Speaker 2: now from Washington with admires of Raima James Amory.
Speaker 3: I would see a good morning, Jonathan.
Speaker 5: The clock is literally ticking for TikTok and today they're
Speaker 5: going to have their day at the Supreme Court to
Speaker 5: try to combat this bill and they will either be
Speaker 5: banned unless they divest away from Byteedance, this Chinese company.
Speaker 6: What do you think happens ed I think on January nineteenth,
Speaker 6: TikTok ceases to exist here in the United States. I
Speaker 6: think the wild card here is that under the law,
Speaker 6: the President of the United States has an ability to
Speaker 6: extend one time for ninety days. So the question that
Speaker 6: I have is, come January twentieth, the next day, does
Speaker 6: Trump activate that ninety day extension and is there a
Speaker 6: deal worked out?
Speaker 5: It sounds like he's going to because he's flip flopped
Speaker 5: since his first time in office in the Oval Office
Speaker 5: when he talked about the security concerns of TikTok that
Speaker 5: now he thinks actually, in an interview with my colleagues
Speaker 5: over the summer, talked about the fact that we if
Speaker 5: you don't have TikTok, then Meta is too big, and
Speaker 5: he understands a lot of individuals get their news from there.
Speaker 5: It seems like he wants to keep it around. So
Speaker 5: what are the options even if there's an extension.
Speaker 6: So after the ninety days, one of the things we
Speaker 6: went through the statute at Raymond James yesterday published a
Speaker 6: report about this, and ultimately it is up to the
Speaker 6: president to declar that what has happened with the divestment
Speaker 6: or for foreign ownership has met the needs of the law.
Speaker 6: And so as long as the president declars, it's okay.
Speaker 6: The problem for Trump, though, is that if there is
Speaker 6: not a divestment, a five thousand dollars per user fee
Speaker 6: gets kicked in. And I don't think the app stores
Speaker 6: at Apple or Google or Oracle's hosting of this wants
Speaker 6: to exist because when you look at the number of users,
Speaker 6: I add that up to about an eighty five billion
Speaker 6: dollar fine. And unless you change the law or you
Speaker 6: have this divested, it will cease to exist, assuming it
Speaker 6: is upheld by the Supreme Court.
Speaker 5: Who can buy this. This isn't even like Elon Musk
Speaker 5: buying Twitter. This is an incredibly expensive company.
Speaker 4: I assume the money would be there.
Speaker 6: The bigger question for me is will the Chinese government
Speaker 6: allow it to be sold, Because ultimately, if you yeah,
Speaker 6: because you can open up the hood, you look in
Speaker 6: in everything that the national security folks have said about
Speaker 6: keystroke capture, about geolocation, about the algorithm potentially manipulating the
Speaker 6: users of TikTok, all of that will be very apparent,
Speaker 6: and we will know even more of how the Chinese
Speaker 6: have been spying on Americans using a very popular app.
Speaker 5: Trump will also be breaking with his national security advisor
Speaker 5: and a secretary.
Speaker 6: Of State, and I mean like Trump will break with
Speaker 6: his administration whenever he wants. I do think it's important
Speaker 6: that you highlight the kind of animis that he's had
Speaker 6: towards Meta and towards the potential benefit to Instagram. Because
Speaker 6: of this, it does look like some of that animis
Speaker 6: might be reduced over the actions by Meta by Mark
Speaker 6: Zuckerberg in recent weeks trying to get him okay.
Speaker 5: Concerns grow on a daylight today when CNN comes out
Speaker 5: and says that Chinese hackers breach Siphius in December, not
Speaker 5: really as surprise, as Jonathan said, because we do know
Speaker 5: that there was Chinese hackers breaching the Treasury Department, but
Speaker 5: isn't this doesnes has become even more of a national
Speaker 5: security concern And what's going to be the response from
Speaker 5: Trump two point zero to Beijing.
Speaker 6: Yeah, I mean, I think it is a extraordinary act
Speaker 6: that we knew that there were Chinese hackers that access Treasury.
Speaker 6: It was downplayed by Janet Yellen recently, but for them
Speaker 6: to have hacked into Siphius, the Committee on Foreign Investment
Speaker 6: into the United States, there was a deal that was
Speaker 6: pending me Bon Steel trying to buy us steal. We're
Speaker 6: looking at all of the potential national security concerns about
Speaker 6: that me Bon's operations within China. For them to be
Speaker 6: looking for exactly what was happening at Cyphius at that
Speaker 6: time is a huge concern. And that's why I've always
Speaker 6: said almost everything in DC related to China is bipartisan.
Speaker 6: The only place you'd don't want to be is being
Speaker 6: seen on being on China side.
Speaker 5: Well, except for potentially one we are waiting for a
Speaker 5: Commerce Department to come out and this was a bloomberg scoop.
Speaker 4: But I know you've been.
Speaker 5: Writing about it for months about Ai chips from Nvidia
Speaker 5: and all roads really lead to China when it comes
Speaker 5: to wanting to make those export controls tougher.
Speaker 4: Correct.
Speaker 6: Yeah, So as early as today, and it's going to
Speaker 6: happen between now in January twentieth, there's going to be
Speaker 6: a final export control rule that comes out from the
Speaker 6: Biden administration. This is going to be focused on the
Speaker 6: number of AI chips that are going to countries that
Speaker 6: we have concerns about. Now we've blocked almost everything going
Speaker 6: to China or to Russia. We're going to allow everything
Speaker 6: to continue to go to our closest allies, but there's
Speaker 6: going to be a tier two company or country list
Speaker 6: where we're going to put caps on how much can
Speaker 6: the Middle East get, how much can Southeast Asia receive. Now,
Speaker 6: generally speaking, I would have expected this to be bipartisan,
Speaker 6: but you have Ted Cruz tweeting out last night strong opposition.
Speaker 6: You have Nvidia coming out with strong opposition. So the
Speaker 6: question I.
Speaker 5: Have is as going to allies or because the time.
Speaker 6: No, because they're going to restrict it going into some
Speaker 6: Southeast Asian in Middle Eastern countries. The real issue here
Speaker 6: is almost all of our export controls usually deals with
Speaker 6: the physical location. But when you're developing data centers and
Speaker 6: you can access that via the cloud, it might not
Speaker 6: matter if that AI chip can't go into China. If
Speaker 6: you build that data center in Malaysia or you build
Speaker 6: that data center in the UAE, if they have that
Speaker 6: cloud access to it, they've essentially had that technology. So
Speaker 6: the chips are going to be limited, and there's going
Speaker 6: to be new rules related to data centers to make
Speaker 6: sure that they are certified and verified that they're not
Speaker 6: giving this technology to China.
Speaker 5: So if you have Republicans already coming out and saying
Speaker 5: we don't want to see this happen, Biden administration is
Speaker 5: doing it on literally their final days in office. Does
Speaker 5: Trump reverse it?
Speaker 6: I think it's going to be hard for him to reverse.
Speaker 6: What they're going to do is it's an interim final
Speaker 6: rule DC speak to It goes into effect immediately, but
Speaker 6: there's an opportunity for the Trump administration to put the
Speaker 6: final tweaks on that. If the caps are too low,
Speaker 6: look for foreign governments to be very transactional. I think
Speaker 6: Saudi Arabia will put a lot of pressure that if
Speaker 6: their cap is too low, Other Gulf countries, other kind
Speaker 6: of parts of the tariff conversation. This could be a
Speaker 6: tit for tat hey, I'm willing to do X, Y
Speaker 6: and Z to avoid tariffs, including trying to remove these
Speaker 6: these AI caps. Is actually going to give Trump a
Speaker 6: new tool in his negotiations globally in terms of what
Speaker 6: does the US have someone that these other countries want.
Speaker 5: I just want to finally end on this point. You're
Speaker 5: talking to everyone on the Hill about the process of
Speaker 5: how his agenda gets accomplished. The bond market, though, is
Speaker 5: focused on the price.
Speaker 3: What do you think we're going to.
Speaker 5: See in terms of how big this bill is going
Speaker 5: to be?
Speaker 6: Yeah, So I put the over under as it relates
Speaker 6: to both an extension of the tax cuts and if
Speaker 6: we do an immigration energy defense bill at one point
Speaker 6: point nine trillion, why do I do that? Because that
Speaker 6: was the cost of the American Rescue Plan. I don't
Speaker 6: see Republicans doing a bill bigger than build back better
Speaker 6: for Biden, and so I do think that we're on
Speaker 6: the under of that.
Speaker 5: But extending the tax cuts is yes.
Speaker 6: Ten years of the tax cuts is four point six
Speaker 6: trillion dollars. Four or five years of the tax cuts
Speaker 6: is about one point five trillion. What would you do?
Speaker 6: I probably see it goes to four or five years.
Speaker 6: The original was eight. You say, hey, we did about
Speaker 6: half as good in trying to get those other things.
Speaker 6: People have been too focused on the ten year extension.
Speaker 6: I think it ends with a much shorter extension.
Speaker 5: Ed Mills, thank you so much for joining me in
Speaker 5: the studio this morning. From DC Jonathan a long list
Speaker 5: of issues that the incoming Trump administration is going to
Speaker 5: deal with, TikTok, export controls, and of course trying to
Speaker 5: get this agenda through which ed Mill says could be
Speaker 5: under true trillion dollars.
Speaker 2: I might a freie time thank you with this amount
Speaker 2: of tybe with Stephanie Roth the Wold Race, said Stephanie,
Speaker 2: and wanted, that's quite a number.
Speaker 7: What you might here is I mean, first of all,
Speaker 7: it is quite a number, but average early earnings were
Speaker 7: point two eight. So this is kind of a goldilocks
Speaker 7: type of report, and this in a way, of course,
Speaker 7: markets are training it as a hotish print, but the
Speaker 7: reality is that wages are growing at below four percent,
Speaker 7: even with job gains running the strong.
Speaker 2: So we don't have to stop talking about interests, right
Speaker 2: hikes anytime soon at the Federal Reserve.
Speaker 7: I don't think we have to be talking about hikes,
Speaker 7: but we have to start thinking about when is the
Speaker 7: FED going to be pausing?
Speaker 4: That's in the real question.
Speaker 1: Well now, I think that that's what people are saying, right,
Speaker 1: they're on pause period.
Speaker 4: I think the question is where they're going to revive.
Speaker 1: I want to go to the point that you're making
Speaker 1: about inflation and that this does sort of question just
Speaker 1: how much inflationary pressure is under the hood of some
Speaker 1: of these gains. How accurate I have the average hourly
Speaker 1: earnings actually been when it comes to inflationary pressures. Because ultimately,
Speaker 1: if people have jobs, they have been shown the willingness,
Speaker 1: particularly of millennials and paying premium form seats on airplanes
Speaker 1: and other things. I mean, there still is the impetus
Speaker 1: to spend if you have a job.
Speaker 7: Yeah, I mean it all comes down to the labor market.
Speaker 7: If the labor market remains healthy, then people are going
Speaker 7: to go out and spend. The thing is that wage
Speaker 7: growth is still running, you know that four percent, which
Speaker 7: given where productivity is, the FED can kind of accept
Speaker 7: something like that. So, and the FED has said this
Speaker 7: a couple of times that they don't believe that the
Speaker 7: labor market is really causing significant inflationary pressures. So now
Speaker 7: the question is just that can the fence they stay
Speaker 7: on pause from here or can they cut one.
Speaker 4: Or two more times.
Speaker 3: So Wednesday's ADP numbers on earnings showed a difference between
Speaker 3: four percent wage increases for those who are on the
Speaker 3: same job seven percent for those who are changing jobs.
Speaker 3: And the question becomes, if we continue to create so
Speaker 3: many jobs, if vacancy is awaited a six month high,
Speaker 3: at what point do earnings become the lagging indicator? At
Speaker 3: what point do earnings respond to what's happening in terms
Speaker 3: of the quantity of jobs.
Speaker 7: Yeah, and that's that's the trend that we saw, you know,
Speaker 7: in twenty twenty two and twenty twenty three, and the
Speaker 7: labor markets are to heat heat, heat up. Is that
Speaker 7: there was that d differentiation between job switchers and job stayers,
Speaker 7: and that is something to keep a close eye on.
Speaker 7: But as of now, the you know, the wage data
Speaker 7: have been fairly contained and if we didn't see a
Speaker 7: a wage price spiral on twenty twenty two and twenty
Speaker 7: twenty three, it's very unlikely we'll see at this time
Speaker 7: around that was the the real strength in the labor market,
Speaker 7: and it didn't really unfold into something that was out
Speaker 7: of controlled wage inflation. So this time I don't anticipate
Speaker 7: that will be the case. To get to your your
Speaker 7: your question earlier, how accurate is is the wage data
Speaker 7: from month to month?
Speaker 4: Not great?
Speaker 7: This this probably was had some calendar effects that pushed
Speaker 7: down some of the data, but on a year of
Speaker 7: a year basis, it's in line close to to what
Speaker 7: the ECI is saying, which is kind of the gold
Speaker 7: standard anyway, So I would say, y, you know, yeah,
Speaker 7: maybe it was uh artificially depressed by some of the
Speaker 7: calendar effects, but the reality is wage growth is running
Speaker 7: a something close to four percent, which is somewhat tolerable.
Speaker 4: For the FED.
Speaker 3: So how confident can we be that we don't get
Speaker 3: these second round effect because some economists will tell you
Speaker 3: it's not surprising. We didn't get it two twenty twenty
Speaker 3: three because people had no memory of inflation, so they
Speaker 3: didn't think that they needed to adjust. Now three years later,
Speaker 3: people have a fresh memory of inflation. So can we
Speaker 3: be as confident that it's just one off? We don't
Speaker 3: get the anticipatory wage demands. We don't get anticipatory price increases,
Speaker 3: I mean.
Speaker 7: And that's gonna be the challenge for the Fed of
Speaker 7: just probably why they're going to have to sort of
Speaker 7: wait this out for a little while. And with tariffs,
Speaker 7: of course, that makes it a little bit more challenging.
Speaker 7: But I think at the end of the day, we'll
Speaker 7: see that the inflation is probably gonna, say, sticky somewhere
Speaker 7: between two and two and a half percent. But I
Speaker 7: don't think we're risking three four five percent like we
Speaker 7: saw last time. So I think this challenge is the
Speaker 7: narrative that inflation is gonna easily get back down towards
Speaker 7: two percent, but something that we saw the last time
Speaker 7: has to be driven by supply chain issues, which we
Speaker 7: currently don't really have.
Speaker 2: If you want just join, I guess welcome to the program.
Speaker 2: Just moments ago, a big upside surprise on a pay
Speaker 2: roaster pull coming in at T fifty six the estimate
Speaker 2: one to sixty five unemployment drum them back as well,
Speaker 2: to four point one percent from four point two. Off
Speaker 2: the back of that, some big moves in the bond market,
Speaker 2: particularly the front end of the curve. The two year
Speaker 2: up by double digits. Off the back of that, as
Speaker 2: you might expand some dollar strength. Euro dollar getting closer
Speaker 2: and closer to break in one oh two. And if
Speaker 2: you check out the equity market, equity features down across
Speaker 2: the board on the S and P five hundred, down
Speaker 2: by point eight on the rustle of small caps, negative
Speaker 2: by one point seven percent. We'll see if all of
Speaker 2: this sticks. We are on five percent watch on a
Speaker 2: thirty eight yield Lisa. The higher the session four ninety
Speaker 2: nine eighty one, and.
Speaker 1: We're pushing back the potential for our first rate cut
Speaker 1: of twenty twenty five from the federal Reserve to at
Speaker 1: one point October. Now we're back to September, but really
Speaker 1: pushing it back. This is where we start to wonder,
Speaker 1: particularly the small cap area, how much this becomes restrictive
Speaker 1: for a small subset of companies. And I think about housing,
Speaker 1: I think about mortgage rates and how much that can
Speaker 1: remain dissonant from the rest of the strength from elsewhere.
Speaker 1: Before you know it actually calls into question some of
Speaker 1: these dynamics.
Speaker 2: Joining us now is Jeff Rosenberg of Blank Rock. He's
Speaker 2: got thoughts on this market, and I'm sure Jeff first
Speaker 2: the votes you, Sarah, and welcome to the program. Your
Speaker 2: reaction to that number you from twelve minutes ago.
Speaker 8: Yeah, well, clearly it's a strong number, and that's the
Speaker 8: that's the market reaction. That's the first point. Second thing
Speaker 8: is the retail component here. It's worth kind of like
Speaker 8: thinking about what's going on here. So it's it's having
Speaker 8: kind of an effect in two parts of the report.
Speaker 8: The retail numbers are underlying are stronger because of the
Speaker 8: shift between November being negative because of the lateness of
Speaker 8: Thanksgiving and Black Friday, so you're seeing a little bit
Speaker 8: of a flattering on the headline number. The other thing
Speaker 8: is that that average hourly earnings which your last guest
Speaker 8: was talking about, which is kind of like the oh,
Speaker 8: it's maybe not so strong.
Speaker 4: We don't have to worry about inflation.
Speaker 8: Because it's you know, a weaker average hourly earnings print.
Speaker 8: You gotta be careful. And the question was, you know,
Speaker 8: how reliable is it on these monthly payroll reports. The
Speaker 8: problem is the mixed shift really can mess with that
Speaker 8: number and the boost to retail this month, maybe factoring
Speaker 8: in those tend to be lower paying jobs, and so
Speaker 8: it may be actually understating the average hour of the earnings,
Speaker 8: which if you didn't have that mixshift, this may actually
Speaker 8: be even a stronger picture, which is then the third point.
Speaker 8: You know, this is just financial conditions tightening because it's
Speaker 8: less need for the FED to cut. You know, we
Speaker 8: priced out most of that, Most of that shift happened
Speaker 8: in the FOMC December meeting. But this is even further
Speaker 8: pushing it along the way. Now, Jonathan, you asked, you know,
Speaker 8: does that mean, you know, when do we start talking
Speaker 8: about the FED having to high rates?
Speaker 4: No?
Speaker 8: No, no, this is pricing out any need for the
Speaker 8: FED to be cutting and pushing on my long standing
Speaker 8: you know refrain every time I come on the show.
Speaker 8: It's just financial conditions are really undermining the fed's view
Speaker 8: that their policy is really that tight, and so they
Speaker 8: don't need to be worried about.
Speaker 4: How tight their policy is.
Speaker 8: And so this is pricing out some of those future
Speaker 8: cuts for twenty twenty five, not that we had that
Speaker 8: many priced in to begin with.
Speaker 1: Jeff, you've asked and answered most of the questions we had,
Speaker 1: So I do want to go to this question of
Speaker 1: what do you do with this?
Speaker 7: Right?
Speaker 1: I mean, are you does this make you more bearish
Speaker 1: on equities or does it actually make you more bullish,
Speaker 1: because ultimately you're not going to find the value in
Speaker 1: fixed income. It is going to come from the growth
Speaker 1: and the strength that we just saw reflected. Yeah.
Speaker 4: Yeah, and you touched on it as well.
Speaker 8: You know, it's a good report, and Muhammed's first point
Speaker 8: was like, hey, this is good news. Is American exceptionalism.
Speaker 8: This is a strong economy. You know, that should be
Speaker 8: good for stocks and risky assets. And I think that
Speaker 8: ultimately is the case. I think the market and the
Speaker 8: valuations have to get over the idea that you're facing
Speaker 8: some higher interest rates.
Speaker 4: I think from the fixed income lens.
Speaker 8: The higher interest rates are actually bringing value relative value
Speaker 8: back to fixed income. You know, we've really shifted the
Speaker 8: pricing of how much do we need the FED to support.
Speaker 8: You talked in the earlier segment about the asymmetry. I
Speaker 8: very much agree with that that the asymmetry is now
Speaker 8: kind of more in favor of fixed income in terms
Speaker 8: of how much war rates can go higher versus the potential.
Speaker 4: For them to go lower.
Speaker 8: And we priced out a lot of that expectation of
Speaker 8: the support from the FEN. I think that's helpful to
Speaker 8: the pricing of the bond market and the kind of
Speaker 8: the selloff that we're seeing here in the front end,
Speaker 8: you know, leading, I think that has reinforced the attractiveness
Speaker 8: of yield in the front end of the yield curve.
Speaker 3: Jeff, it seems that we're very comfortable with the notion
Speaker 3: that this pushes back whatever weight hikes, who weight cuts
Speaker 3: we're going to get and we're going to get fewer,
Speaker 3: et cetera. But the minute someone mentions a weight hike,
Speaker 3: everybody gets really really uncomfortable. So no, no, no, we're not
Speaker 3: there yet. What does it take to get there? I
Speaker 3: think it takes a lot to get there.
Speaker 8: I mean that's a very big swing, and obviously what
Speaker 8: it takes to get there, Muhammad, And you know this
Speaker 8: is it's inflation, and not just like the somewhat unease
Speaker 8: of sticky inflation, but a complete change in the narrative
Speaker 8: that for all the forecasting of the underlying opponents and
Speaker 8: the imputed data and our understanding of inflation, that we've
Speaker 8: just gotten that so wrong. And there's a reacceleration in inflation.
Speaker 8: I think you have to have a reacceleration, not the
Speaker 8: slowing in the movement to two percent, to shift the
Speaker 8: FED and the markets expectation that this goes to tightening,
Speaker 8: I think it's a very high bar to get there,
Speaker 8: and we're really just pricing out the last few expected cuts.
Speaker 4: In twenty twenty five.
Speaker 2: Well, Jeff, let me put it another way, then, how
Speaker 2: high is the boun to cut again given what we've
Speaker 2: just seen over the past few months.
Speaker 8: Yeah, you know, I don't think the bar to cut
Speaker 8: again and to change the expectations on cuttings that high either.
Speaker 8: I mean, look at what we went through last year
Speaker 8: in terms of the swings in market expectations on what
Speaker 8: the FED would do and the FED zone forecasting on
Speaker 8: what it would do, and the extreme data dependence here.
Speaker 8: So the bar to more cutting is we're seeing that
Speaker 8: stabilization in inflation, not the risk on inflation, and for
Speaker 8: whatever reason, obviously not the story today. You're seeing that
Speaker 8: slow down that the FED is feared in the labor markets,
Speaker 8: and a couple of data points on labor markets again,
Speaker 8: now what we're seeing today sub one hundred, you know,
Speaker 8: pictures increases in unemployment rates. You get two reports in
Speaker 8: a row of that, you can very quickly shift the
Speaker 8: narrative back to O, the Fed's got to cut two
Speaker 8: maybe three because of this extreme data dependence that we
Speaker 8: have the FED driving market expectations.
Speaker 1: I see Stephanie Ross nodding along. I do want to
Speaker 1: just point out that briefly the thirty year yield did
Speaker 1: hop above five percent before coming back down, but it's
Speaker 1: right now four point nine up there, it is five percent.
Speaker 1: Once again, you're shaking your head. Do you agree with
Speaker 1: what he's saying?
Speaker 7: Yeah, I agree. The Fed's been data dependent, but like
Speaker 7: very much on every data point right, So to the
Speaker 7: extent that we have another couple of prints that are
Speaker 7: a little bit softer in the beginning part of you know,
Speaker 7: in the next couple of months, then the narrative can
Speaker 7: shift to some extent. We've seen every three months in
Speaker 7: the market has been swinging from soft landing, the hard
Speaker 7: landing to no landing, and realistically you're probably somewhere in between.
Speaker 7: So base case at this point is that you know,
Speaker 7: the narrative is gonna continue for a while, then you're
Speaker 7: gonna have the Q one inflation seasonality problems again. So
Speaker 7: it's probably gonna be towards the middle part of the
Speaker 7: year when the when we could start talking about potential
Speaker 7: cuts again.
Speaker 3: So Stephanie said, the data. The FED is data dependent,
Speaker 3: not only overall, but every single data point, which of
Speaker 3: course power would push back on you and say no, no,
Speaker 3: And that makes us all data dependent, right, and it
Speaker 3: makes us all add volatility to a market because we
Speaker 3: all we get swung around. Doesn't that bother you? Doesn't
Speaker 3: it bother you that everybody has become so data dependent.
Speaker 4: It does.
Speaker 7: Nobody should be caring about the unemployment rate to three
Speaker 7: decimals and averagellit yearning to the same kind of thing.
Speaker 7: I just had that conversation with Tom Keane earlier. It
Speaker 7: makes us uncomfortable, but we all have to We all
Speaker 7: are in this, in this environment, even though they're trying
Speaker 7: to steer us away from that. In theory, the FED
Speaker 7: continues to get swung around by every data point, So
Speaker 7: then we all have to focus on the same thing
Speaker 7: and figure out every new once within every single print.
Speaker 7: The retail thing is a good point in the sense
Speaker 7: that it was minus twenty nine last time and now
Speaker 7: it's jumped back up forty three. Realistically, that drove some
Speaker 7: of the strength and you know, you probably should smooth
Speaker 7: that out but we're in an environment that it's going
Speaker 7: to be tough, and by the way, next print, we're
Speaker 7: gonna be impacted by all of the fires, and that's
Speaker 7: going to be a really messy data point as well.
Speaker 3: Do you think of any fed that got swung around
Speaker 3: as much as this feed is getting swung around? I mean,
Speaker 3: I think back of the financial I mean I think
Speaker 3: back of so many bigger episodes.
Speaker 2: To go post pandemic, post pandemic. This Federal Reserve allowed
Speaker 2: the administration of the time to come out with huge
Speaker 2: fiscal plans and the supplying constrained economy and just say.
Speaker 4: We'll look through it.
Speaker 2: We'll look through it. They weren't dated data dependent. Then
Speaker 2: they waited the change in behavior on the f WEMC.
Speaker 2: I hear a lot of economists present company excluded a
Speaker 2: lot of economists who are more keen to defend the
Speaker 2: institution that provide critical analysis of it. That's really problematic
Speaker 2: for me. For economists on Wall Street who are held
Speaker 2: bent on making sure that their friends at the FMC
Speaker 2: still give them access to have conversations at NAPE, etc.
Speaker 2: They're actually just calling things out for the way they
Speaker 2: see it. This Federal Reserve has behaved very differently under Biden,
Speaker 2: and it's changed when Donald Trump has come into power.
Speaker 2: They've opened the door to those accusations themselves with that
Speaker 2: news conference back in December, without a doubt.
Speaker 3: Do you agree, No, I agree that now we have
Speaker 3: a FED that's navigating two things, the monetary policy landscape
Speaker 3: and the political landscape.
Speaker 4: It's not navigating one thing anymore. It's not navigating two things.
Speaker 3: And we just have to keep.
Speaker 4: That in mind.
Speaker 2: Why wasn't it navigating the political landscape two three years ago? Well,
Speaker 2: it's clear that fiscal policy was in the driving sea.
Speaker 3: I think two three years ago they were asleep and
Speaker 3: the worsh to call inflation transitory. Ignoring the policy side,
Speaker 3: ignoring all the uncertainty was a big mistake. And because
Speaker 3: of that, they became extremely data dependent and they don't
Speaker 3: even want to look forward anymore. And it's ironic because
Speaker 3: we're dealing with markets that are supposed to be looking forward.
Speaker 3: We're supposed to be discounting the future, right, and yet
Speaker 3: we've all become completely dependent on what's just happened.
Speaker 4: It's absurd, but that is what happens.
Speaker 3: When the institution, with the printing press in the basement
Speaker 3: decides that it will become excessively data dependent. It turns
Speaker 3: us all into extreme data dependence.
Speaker 2: They may again at the end of this month, we'll
Speaker 2: get two more data points before then. CPI is one,
Speaker 2: the inauguration is another. What's this news conference, this mating
Speaker 2: rather going to look like at the end of this month.
Speaker 3: Yeah, I mean I.
Speaker 7: Think we're going to well, let's first talk about maybe CPI,
Speaker 7: because that we're looking for something that should be a
Speaker 7: little bit more soft, something Z point two four percent
Speaker 7: on core, which you know should should be Okay, I
Speaker 7: don't think it's going to change anybody, especially after this print.
Speaker 7: This print made the CPI a lot less important. And
Speaker 7: then we're going to have to see from the Trump administration,
Speaker 7: what are we what's going to happen in terms of immigration.
Speaker 7: That's going to be one of the biggest things that's
Speaker 7: going to happen, probably right off the bat. How M
Speaker 7: how much or how M how how aggresive are they
Speaker 7: gonna go? It's probably gonna be at the uh A
Speaker 7: Y a lot of a lot of you know, I'll
Speaker 7: bark at the beginning, and then realistic, we're not gonna
Speaker 7: see that much deportations because that's gonna require funding that
Speaker 7: they don't have, and it's probably just gonna be people
Speaker 7: rolling off the humanitarian parole uh in TPC. But that's
Speaker 7: gonna be a big thing to watch out for. And
Speaker 7: then the second is what a w what's gonna happen?
Speaker 7: From a tariff perspective, we haven't really heard much specifics. Uh,
Speaker 7: you know, we're we're we're l we're winding back to
Speaker 7: the announcement on Canada and Mexico. Are we gonna get
Speaker 7: more of that? Probably not, and we're not hearing much
Speaker 7: of it. But those are the two things we're looking
Speaker 7: out for most from him tariffs and uh uh tariffs
Speaker 7: and uh what we're h hearing from integration perspective.
Speaker 1: Jeff, as an investor who has to take a longer
Speaker 1: term view, how do you remain independent from the successive
Speaker 1: data dependence? So we were just talking about how do
Speaker 1: you have any conviction with calls at a time where
Speaker 1: people are talking about how much the parameters could change
Speaker 1: based on whether it's CPI or whether it's Jan twentieth
Speaker 1: and the inauguration.
Speaker 8: Yeah, it's really recognizing, you know, the things that you
Speaker 8: think you can forecast and recognizing the things.
Speaker 4: That are just not forecastable.
Speaker 8: And we have a little saying if you can't forecast,
Speaker 8: and I would put all of the policy uncertainties that
Speaker 8: were just described in that category, then you have to observe.
Speaker 8: And so you just kind of like know what you
Speaker 8: can kind of control, and know what you can't control,
Speaker 8: know what you can forecast, know what you can't forecast,
Speaker 8: try not to overreact to every data point. But on
Speaker 8: the fiscal policy, I mean that is that is basically
Speaker 8: the story for the twenty twenty five outlooks is uncertainty
Speaker 8: and unforecastability. So we're gonna have to kind of recognize
Speaker 8: that and we're going to sit back, We're going to
Speaker 8: be patient, We're going to observe, and then you know,
Speaker 8: as the information becomes more clear, that's when you can
Speaker 8: take action in your portfolio.
Speaker 4: Is to try to do it ahead of time.
Speaker 8: I think you just have to recognize that it's a
Speaker 8: very difficult exercise both forecasting what is going to be
Speaker 8: the policy and equally forecasting what is going to be
Speaker 8: the market reaction to that. Getting both of those rights
Speaker 8: very unlikely. So you're going to have to sit back
Speaker 8: and wait for the data to reveal itself.
Speaker 2: Hey, Jeff, appreciate your time, sir. As always, Jeff Rosenberg,
Speaker 2: there at blankrupt will take a step back and a
Speaker 2: big deep breath and look ahead to see PI next Wednesday,
Speaker 2: as well as some bank earnings too.
Speaker 4: Mohamma.
Speaker 2: Just a final thought around the table. We came into
Speaker 2: twenty five thinking about US exceptionalism and global divergence. And
Speaker 2: Lisa and I've been talking about this for a number
Speaker 2: of days now, number of weeks. The extent to which
Speaker 2: we can keep stretching that rubber band, how far can
Speaker 2: we take that, How much oxygen is left in that
Speaker 2: story before we get these negative feedback loops and things
Speaker 2: start to move in the other direction.
Speaker 3: I mean, that's a great question, and I'm not sure
Speaker 3: I can answer that, but I can tell you that
Speaker 3: the theme of dispersion is really important because there's a
Speaker 3: limit to how long you can run a system with
Speaker 3: significant dispersion. And we have two main discerssion issue US
Speaker 3: visay the rest of the world. The hope is the
Speaker 3: rest of the world comes up to the US. The
Speaker 3: fears of the rest of the world drags the US down,
Speaker 3: and then within our economy, low income versus the rest.
Speaker 3: Low income is the struggling right now. We must not
Speaker 3: forget that, and these numbers cannot make us not also
Speaker 3: consider what's happening at that end, because at some point
Speaker 3: that we can can migrate up. So the theme we're
Speaker 3: going to be talking about a lot is forget about averages,
Speaker 3: look at sectors, and that is in the marketplace. We've
Speaker 3: gone from a market focus to a theme focus, and
Speaker 3: now it's going to all be about individual names.
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