Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
Speaker 2: Bramwods along with Tom Keen and Jonathan Ferrell join us
Speaker 2: each day for insight from the best in economics, geopolitics,
Speaker 2: finance and investment.
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Speaker 3: Joining us is Heidi Kreeve Iredica, senior fellow at the
Speaker 3: Council and Form Relations. Heidi, is there some secret little
Speaker 3: plan and do you have it with us this morning?
Speaker 4: Yeah? I come bearing the secret plan.
Speaker 5: No, I think I think you're consistent with with what
Speaker 5: many of your speakers have been have been talking about.
Speaker 5: This meeting today is really, you know, the best the
Speaker 5: best outcome is that they continue to talk and negotiate
Speaker 5: and open some you know a little bit of daylight,
Speaker 5: uh in the the ability to you know, to carry
Speaker 5: on where this goes. There is no secret plan, and
Speaker 5: I think the most important thing that markets need to
Speaker 5: understand is that this is that we're in We're in
Speaker 5: unchartered territory right now because we you know, when we've
Speaker 5: had these these standoffs in the past, we haven't had
Speaker 5: such a polarized Congress and polarized politics. We haven't had
Speaker 5: such a narrow, narrow majority in the House, and we
Speaker 5: haven't had a speaker who's made it a deal that
Speaker 5: we don't We don't really know, you know, how much negotiating.
Speaker 4: Power he has.
Speaker 5: But he did just pass He did just pass a
Speaker 5: you know, a bill, and it gives him leverage. So
Speaker 5: there is no secret plan. I expect after this meeting today,
Speaker 5: everyone's going to take to the to to raw politics,
Speaker 5: going out to constituencies, whether it's business constituencies, whether it
Speaker 5: is going after brad you know, fragile red states where
Speaker 5: you have veterans, fentanyl, social security checks.
Speaker 4: You're going to have a full blast.
Speaker 5: On media about what's at risk here. And I don't
Speaker 5: think that the Republicans are necessarily going to budge. I
Speaker 5: don't think McCarthy has a lot of room to budge.
Speaker 5: So there is no secret plan.
Speaker 2: So when you said markets need to understand there is
Speaker 2: a question about whether markets are being held hostage by
Speaker 2: this negotiation, that basically, as we heard from dalliep saying yesterday,
Speaker 2: if Peacham fixed income. Essentially, politicians are waiting for markets
Speaker 2: to freak out, for the S and P to tank
Speaker 2: before they go to their constituents and say we had
Speaker 2: no choice. Is that really what's going to basically have
Speaker 2: to happen before there's a deal.
Speaker 5: So I think I would agree with Deleepe that there
Speaker 5: there needs to be market pressure.
Speaker 4: There needs to be something, and we already have.
Speaker 5: I mean, it's unfortunate that that's what we're looking to
Speaker 5: pressure Paula Tians. But without that market, that market signal,
Speaker 5: it makes it hard for McCarthy to go to the
Speaker 5: holdouts who are holding him hostage and say it is
Speaker 5: time to do a temporary left of the of the
Speaker 5: debt ceiling to get us through and get us a
Speaker 5: little bit of space to negotiate between so that nobody
Speaker 5: loses space at the end of this.
Speaker 2: This is incredibly difficult because if the politicians are waiting
Speaker 2: for markets to respond, markets are thinking we've been through
Speaker 2: this before and we're just going to lose our shirts.
Speaker 2: We're going to lose money and be on the wrong
Speaker 2: end of this if we play into this game of chicken.
Speaker 2: As John put it earlier, that Washington is playing with markets,
Speaker 2: So at what point is it's just becoming circular before
Speaker 2: markets don't respond and then there is no deal. It
Speaker 2: actually makes it more likely that we get some sort
Speaker 2: of default. So the.
Speaker 5: Fact that we're talking in Washington about needing markets and
Speaker 5: markets art and wall streets looking at Washington saying you
Speaker 5: guys got to do your job, it just it shows
Speaker 5: you what a gap there is between between between DC
Speaker 5: and New York and it's it means that we have,
Speaker 5: you know, it means that the system is obviously broken.
Speaker 5: It also means that we're putting out this picture on
Speaker 5: the world stage of the United States as as being
Speaker 5: hugely dysfunctional and not not a leader and steward of
Speaker 5: global markets and and the global economy. The the the
Speaker 5: pressure needs to come, and whether it comes from outreach
Speaker 5: to constituents and particularly in fragile states, or from or
Speaker 5: from markets, there needs to have We need to have
Speaker 5: the pressure that gets us to a relief period so
Speaker 5: you can align budget negotiations and debt ceiling negotiations so
Speaker 5: that everyone can walk away with some face saving at
Speaker 5: the end of this. And we hope we get there.
Speaker 5: It's more likely to be in the fall than than
Speaker 5: over the summer. But in the meantime you're going to
Speaker 5: have a lot of a lot of politics playing out,
Speaker 5: and that is that is bad for well, it will
Speaker 5: give you a lot to talk about, which this story
Speaker 5: is not going to end just you know today after
Speaker 5: this meeting, Hi.
Speaker 3: Do you alluded to something really important, Whether this compromise
Speaker 3: is the United States on the international stage going into
Speaker 3: the G seven Do you thymna's the case?
Speaker 4: I think it. I think we have we lose credibility.
Speaker 4: We go in.
Speaker 5: We go in with with a desire to project power,
Speaker 5: to project the strength of the dollar as the as
Speaker 5: the central reserve currency of the world that we use
Speaker 5: underpins our sanctions, our economics, state craft. We have the deepest,
Speaker 5: most liquid capital markets in the world.
Speaker 4: We have you know, I don't think we.
Speaker 5: Actually even have a threat to the dollar that is
Speaker 5: out there right now except from our own doing our
Speaker 5: our own you know, it's an own goal from from
Speaker 5: from you know, from from all from every way you
Speaker 5: look at it.
Speaker 4: So Janet Yellen is coming, uh?
Speaker 6: Is uh?
Speaker 4: Your her G seven meeting? Is?
Speaker 7: Uh?
Speaker 4: Is cut short?
Speaker 5: We have Biden heading out to a G seven and
Speaker 5: quad meeting at the leader's level later this month. This
Speaker 5: will this will all be background music to a president
Speaker 5: that wants to go out and talk about leadership, stewardship, responsibility,
Speaker 5: and at home, we're going to have this political morass
Speaker 5: of debt ceiling negotiations.
Speaker 3: For a long, long time, the US had the luxury
Speaker 3: of doing questionable things. How do you think that luxury
Speaker 3: is no longer there?
Speaker 5: So I think that this. You know, our friends are
Speaker 5: watching us very closely. We're heading into a polliction of
Speaker 5: a presidential election cycle, so we're you know, our friends
Speaker 5: are wanted watching us closely, but we're literally playing into
Speaker 5: the hands of our foes, those who would be we're
Speaker 5: you know, we're handing the talking points to two adversaries
Speaker 5: right now about the US is losing its ability to
Speaker 5: lead the global global economy, you know, to lead the
Speaker 5: global global alliances. And it's just the timing is very bad.
Speaker 5: It's at a time when we are really trying to
Speaker 5: reassert that leadership and we're not showing it at home.
Speaker 3: Hidi, appreciate your time. Let's catch up soon. Wonderful input
Speaker 3: and insight as always from Heidi Kreboretica of the Council
Speaker 3: on Foreign Relations please to side that joining us NAS.
Speaker 3: Robert Tip, chief investment strategist, had a global bonds at
Speaker 3: PGIM Fixed Income. Robert, we talked about the eleventh hour.
Speaker 3: Someone corrected us very quickly and said, it won't be
Speaker 3: the eleventh hour. It will be the eleventh hour, the
Speaker 3: fifty ninth minute, and the fifty ninth second, And Robert Tip,
Speaker 3: maybe that's the case when we get to the eleventh
Speaker 3: the fifty ninth minute, and the fifty ninth second, if
Speaker 3: it gets messy, Robert, are we buying go selling treasuries.
Speaker 2: Right?
Speaker 6: Well, in the short term, I.
Speaker 8: Think you're buying treasuries right. It'd be a risk off event,
Speaker 8: and there may be variations in how the curve deals
Speaker 8: with it. It could be bad for the back end
Speaker 8: of the curve, the long end could underperform. But in
Speaker 8: a flight to quality, treasuries usually do well. We saw
Speaker 8: that in the SVB crisis, and we've seen it in
Speaker 8: past debt crises in the US before, and I think
Speaker 8: that would be the case this time as well. I
Speaker 8: think it's worth keeping in mind of that twelve to
Speaker 8: twenty four months down the road, unless we happen to
Speaker 8: be right out another debt ceiling debate. You know, I
Speaker 8: don't think this is going to matter. I think it
Speaker 8: is extremely important in the short term how it gets resolved,
Speaker 8: and it may be of epic proportions if you've got
Speaker 8: certain kinds of outcomes, some that are are widely envisioned
Speaker 8: and some may be less. But twelve to twenty four
Speaker 8: months from now, I think the basics the risk here,
Speaker 8: alluding to your curve, which is expecting rate cuts, is
Speaker 8: that we may have evolved into a different kind of
Speaker 8: secular environment where the growth is not so much so
Speaker 8: debt driven, and that as a result, growth continues here
Speaker 8: and we end up seeing the FED holding or doing
Speaker 8: war hikes and getting some upward adjustment in the belly
Speaker 8: of the yield curve.
Speaker 3: Interesting. So, Robert, two time horizons there and two things
Speaker 3: to unpack. Let's deal with them separately. Let's deal with
Speaker 3: the first one the short term. Do you and the
Speaker 3: team think this gets solved anytime soon the debt ceiling
Speaker 3: gets addressed, and what informs that view? What do you
Speaker 3: look to, Robert to get that idea?
Speaker 6: Sure?
Speaker 8: Well, I think the easy part is that nobody it's
Speaker 8: nobody's interest to cave early. Everybody wants to show that
Speaker 8: they negotiated up until very last minute, and the system,
Speaker 8: in a way is in place. You know, the United States,
Speaker 8: this freak of nature, with this messy system that's been
Speaker 8: you know, ultimately very successful, is designed to prevent any
Speaker 8: one idea, any one party, any one group from getting
Speaker 8: too much power. So it's very hard to move anything
Speaker 8: forward or stop anything. This is going to go right
Speaker 8: down to the last minute. I think what'll be interesting
Speaker 8: in a way though, is if Joe Biden goes for
Speaker 8: a power play of sorts, since it being kind of
Speaker 8: a sleeper in the sense of continues to say, you know,
Speaker 8: this is the best budget that you could pass, and
Speaker 8: all of the spending, all the taxes, these are the
Speaker 8: best policies that you could come up with. You need
Speaker 8: to have the borrowing capacity. And if they do not
Speaker 8: give him a clean increase in the net ceiling, that
Speaker 8: he invokes the fourteenth Amendment, goes ahead and makes the payment,
Speaker 8: and the worst case scenario would be that then you know,
Speaker 8: the government is sued effectively. I'm not a legal expert,
Speaker 8: and either it's upheld or it's shot down. If it's
Speaker 8: shot down, well then every time you come up against
Speaker 8: the debt ceiling. You have to get it raised. But
Speaker 8: on the other hand, if it's upheld and prioritization of
Speaker 8: principle and interest payments is allowed, then this thing has
Speaker 8: gone forever. In a way, that's a loss in that
Speaker 8: it allows profligate increases in det GDP to continue ad nauseum,
Speaker 8: But in terms of traders and anxiety, it would be
Speaker 8: a big win.
Speaker 2: Well, this is something that Jenny Allen is called the
Speaker 2: constitutional crisis should it be invokes, So it's not necessarily
Speaker 2: what they want to have happen at a time when
Speaker 2: they do not want the legal challenges and they want
Speaker 2: some sort of consensus. Let's put that aside for one minute, Robert,
Speaker 2: and get your sense of how this is going to work.
Speaker 2: If the market just sits on its hands, are you
Speaker 2: concerned that a lack of reaction as everyone waits for
Speaker 2: the eleventh hour, fifty ninth minute and fifty nine second
Speaker 2: to make any kind of moves will mean that this
Speaker 2: actually will not get done in time.
Speaker 8: I think that you are going to see an increase
Speaker 8: in anxiety as the balances run low, and you know,
Speaker 8: if there's an accidental default, you will see a dropping
Speaker 8: stock prices, a dropping yields into widening your credit spreads.
Speaker 8: But I think that the economy is pretty resilient to
Speaker 8: those kinds of shocks. I mean, whether you're looking at
Speaker 8: October nineteen eighty seven and the stock market decline them,
Speaker 8: whether you're looking at the volatility surge in twenty eighteen,
Speaker 8: the economy is not derailed by those incidents of volatility.
Speaker 8: And most like the current cycles, the increase in interest rates,
Speaker 8: saying in nineteen ninety four quick fed rate hike cycle,
Speaker 8: a lot of volatility in the markets. Economy powers through that.
Speaker 8: So again I think twelve to twenty four months from now,
Speaker 8: there is not going to be a major economic event.
Speaker 8: It could, though in the short term, be very drawing
Speaker 8: for the markets.
Speaker 2: Well how do you play that? I mean, is it
Speaker 2: frustrating for you? Do you feel like you're being used
Speaker 2: as a pawn as a market participant in Washington's games?
Speaker 2: Or is this a good trading opportunity or perhaps you
Speaker 2: can get ahead and have an edge.
Speaker 8: Yeah, I think there's a little bit of each. I
Speaker 8: think that in the CBS markets, you know, the in
Speaker 8: terms of the term structure there, I mean, people are
Speaker 8: paying real money to protect against the default in the
Speaker 8: short term, and you know, there could be a trade
Speaker 8: to do there. But I think as an investor, everybody
Speaker 8: has their edge, and I would think, you know, for
Speaker 8: some for investors, their edge may be in as fascinating.
Speaker 8: What's the twelfth to twenty four month environment. How are
Speaker 8: fundamentals dramatically differently priced from where they should be? And
Speaker 8: I think right now is one of those environments where
Speaker 8: the market is heavily biased towards pricing and a recession
Speaker 8: and having a more optimistic view is going to be
Speaker 8: the best approach. Tactical trades on the debt ceiling. I
Speaker 8: think you can do on the margin, but should not
Speaker 8: be a major aspect.
Speaker 3: Did you buy some Apple debt yesterday, Robert, Yeah, I'm.
Speaker 8: Not going to comment on the trades.
Speaker 3: Yeah, but you can build a little bit, Robert, if
Speaker 3: you can, I think, yeah.
Speaker 8: I think the market here, you know, is supportive. Here
Speaker 8: sees yields as having traversed the range of the last
Speaker 8: ten twenty years, and yields are attractive. And I think
Speaker 8: some of the inversion of the curve, the demand for
Speaker 8: corporate bonds, the fact that spreads are supported in the
Speaker 8: face of what people think is going to be a
Speaker 8: recession is indicative of the fact that people need yield
Speaker 8: and if the market is well supported and that you're
Speaker 8: likely to see spreads. The range that we've seen over
Speaker 8: the last year is going to hold.
Speaker 3: Robert Tip the page and diplomatic at the end there.
Speaker 3: Thank you, sir, Robert Tip on a credit market constructive.
Speaker 3: Lisa Chalett joins US now chief investment officer at Margan
Speaker 3: Stanley Worth Management. Lisa, thanks for ving with us. I
Speaker 3: won't ask you to translate, Lisa, We'll ask you this though,
Speaker 3: just how frustrating is this market, Lisa, when you look
Speaker 3: at things like all the right cuts that are being priced,
Speaker 3: yet at the same time there is this feeling that
Speaker 3: we will continue to live with durable growth.
Speaker 6: Yeah.
Speaker 7: So, look, I think there are a lot of conundrums
Speaker 7: in this current market, and I think that probably the
Speaker 7: single most frustrating thing is the benchmark.
Speaker 6: At this point.
Speaker 7: You know, most institutional investors, most retail investors define the
Speaker 7: market as the S and P five hundred index. That index,
Speaker 7: as we know, is up almost eight percent a year
Speaker 7: to date, up seventeen percent from last October's low, but
Speaker 7: certainly for the last you know, four or five months.
Speaker 7: A huge portion of that move, at least, you know,
Speaker 7: since January thirty first, has essentially come from seven stocks,
Speaker 7: the megacap tech stocks who led for most of the
Speaker 7: prior thirteen years, the you know what we you know,
Speaker 7: I think affectionately nicknamed the fangs or fangs M plus whatever.
Speaker 7: And I think what has been frustrating is that underneath
Speaker 7: the surface, a lot of the indicators that are flashing
Speaker 7: recession have crushed the cyclicals. We've seen the devastation of
Speaker 7: the regional banking system as the FED has raised rates
Speaker 7: and as the implications of tightening have.
Speaker 6: Begun to show.
Speaker 7: And yet there's that benchmark, you know, supported by that
Speaker 7: heavy concentration at the top, you know, chugging along. When
Speaker 7: low the surface there seems to be you know, some
Speaker 7: pain and suffering and damage.
Speaker 6: Small caps in particular have been crushed.
Speaker 3: So, Lisa, the question we've got to ask then is
Speaker 3: can this persist? And if it come, what would bring
Speaker 3: down some of the big tech heavy weights that have
Speaker 3: supported this market.
Speaker 7: Yes, I think the reality is that in the short
Speaker 7: term it can persist, you know, certainly as long as
Speaker 7: we're you know, kind of in this stalemate, I think
Speaker 7: to your point between you know, some labor market resilience,
Speaker 7: the power of pricing power, and some of the nominal
Speaker 7: growth drivers that can support some of those names.
Speaker 6: Now, ultimately, you know, our.
Speaker 7: Thesis has been that, you know, there are no companies
Speaker 7: that ultimately are immune from recession or significant economic slowing,
Speaker 7: and we don't think that this time ultimately will be different,
Speaker 7: even though it has felt that way at moments. So
Speaker 7: our best gas continues to be that there are some
Speaker 7: earnings disappointments out there. I mean, one of the things
Speaker 7: that folks have to digest is that the way earnings
Speaker 7: are modeled, it looks like we're on a hockey stick
Speaker 7: towards recovery over the next couple of quarters, with you know,
Speaker 7: this first quarter that's being completed representing a trough in
Speaker 7: earnings growth, and then we kind of, you know, kind
Speaker 7: of get year over year earnings that are better and
Speaker 7: better every quarter until we get to twenty twenty four,
Speaker 7: where the market's looking for up thirteen percent earnings.
Speaker 6: Now, you know, we're still very close to.
Speaker 7: Peak economic growth and peak corporate profit margins. So that's
Speaker 7: going to be a feat to achieve those expectations.
Speaker 2: Lisa, what would it take for you to throw in
Speaker 2: the towel and basically just say this time is different.
Speaker 7: I think the fundamental issue for us is if we
Speaker 7: see a reacceleration in economic growth, if the consumer really
Speaker 7: does prove to be resilient, if the slowing that we
Speaker 7: expect to emanate really from the credit crunch does not materialize,
Speaker 7: if there's enough savings cushion, and we.
Speaker 6: Would probably see that in the next.
Speaker 7: Two quarters where these earnings that look like a hockey
Speaker 7: stick recovery are achieved. If those earnings are achieved, then
Speaker 7: quite frankly, our thesis is wrong.
Speaker 2: There's another aspect to this that some people keep bringing up,
Speaker 2: which is perhaps the largest companies are consolidating market share
Speaker 2: to such a degree and taking it away from smaller companies.
Speaker 2: So you could see small cabs basically blown up, absolutely
Speaker 2: decline dramatically, which is something that we have seen in
Speaker 2: certain pockets, even as the large cabs continue to chug
Speaker 2: along and chart really impressive growth. Do you expect that
Speaker 2: kind of environment, that that's going to be the new
Speaker 2: reality for a while.
Speaker 6: Look, I think it is possible.
Speaker 7: Anything is possible, and certainly there are a host of
Speaker 7: these companies that have very, very dominant positions. But I
Speaker 7: do think that we're at a political point of a
Speaker 7: political moment where, you know, the tolerance for you know, further,
Speaker 7: big company consolidation does start to be debated as an
Speaker 7: antitrust issue in a way that perhaps it hasn't been
Speaker 7: quite frankly for over forty years since since the Reagan administration.
Speaker 7: And look, some of you know, government in action is
Speaker 7: what's gotten us here, and so you know what may
Speaker 7: break the log jam? Maybe you know some attempts at reregulation.
Speaker 3: Have we done the debt saving yet?
Speaker 1: Bromo nod to do that?
Speaker 3: Now go for it, Lisa, stick around place, just for
Speaker 3: sixty seconds, least of the dead sailing. When clients ask
Speaker 3: you about this, what are even the team telling them
Speaker 3: at the moment.
Speaker 7: The fundamental thing that we're telling them is, Look, it's
Speaker 7: not a question of if, it's a question of when
Speaker 7: and how. The question of when. What's critically important from
Speaker 7: where we sit is what will Janet Yellen do after
Speaker 7: she gets approval.
Speaker 6: To extend borrowing?
Speaker 7: And what we mean by that is at what pace
Speaker 7: and what duration is she going to issue? Because if
Speaker 7: you're down to kind of a zero in the Treasury
Speaker 7: General Account. It is very possible that in the you know,
Speaker 7: last four months of the year, you know, she's going
Speaker 7: to be issuing to the tune of you know, six
Speaker 7: hundred and fifty to seven hundred and fifty billion dollars,
Speaker 7: which is a drain of liquidity at the same time
Speaker 7: that we may have some of these credit fronch issues
Speaker 7: where we're continuing to pursue quantitative tightening. So the first
Speaker 7: thing that we're telling clients is beware of the liquidity implications.
Speaker 7: On the other side, the second thing that we're talking
Speaker 7: about is the how it matters, uh, you know, to
Speaker 7: forward looking expectations of growth in terms of what is
Speaker 7: cut if if that's what it takes to get a
Speaker 7: deal done, commitments to cut fiscal spending.
Speaker 6: What's cut?
Speaker 7: Are there rollbacks of some of the Inflation Reduction Act
Speaker 7: Act spending related opportunities, some of the infrastructure spending that
Speaker 7: is kind of in motion, and those things have been
Speaker 7: a support to growth, uh, And if we need to,
Speaker 7: you know, take that out of the forward forecasts, that
Speaker 7: is going to dampen economic growth.
Speaker 3: Lisa, wonderful response. Thank you, Lisa, Shannader moment Stanley Wealth Management.
Speaker 3: In fact, there was fantastic.
Speaker 2: One of my favorite economists ever, Neil dad I joining
Speaker 2: us now. I always love hashing this through with you.
Speaker 2: He's head of US economic research at Renaissance Macro.
Speaker 1: I want to start there. What's going to win here?
Speaker 2: The consumers who keep spending and now are borrowing or
Speaker 2: companies that are pulling back spending and being more conservative.
Speaker 9: No, I think the consumers will win. Historically the causality
Speaker 9: goes from consumers to businesses, right, So I think the
Speaker 9: issue is that, you know, companies have been preparing now
Speaker 9: for several quarters for a recession that hasn't yet arrived,
Speaker 9: and I think they're moving further away. You know, they're
Speaker 9: further off sides on growth, and you know, if the
Speaker 9: consumer continues to hang in there, there may be a
Speaker 9: period of catch up that happens where they have to
Speaker 9: restock their inventories, maybe adjust their capex budgets, maybe hire
Speaker 9: a bit more post more openings. So I definitely, you know,
Speaker 9: I mean to me, it's also so Lisa, as you know,
Speaker 9: it's really about what is the consensus pricing in and
Speaker 9: then what is the likely outcome? You know going to
Speaker 9: be and then you try to pick your battles as
Speaker 9: wisely as you can. And you know, to me, the
Speaker 9: consensus right now is expecting a recession to start really
Speaker 9: in this quarter, I mean June Q three. I mean
Speaker 9: the Bloomberg News consensus I think is for flat growth
Speaker 9: in each of the next two quarters. And I don't know.
Speaker 9: I mean, it just doesn't seem like that's going to happen.
Speaker 9: And we had a strong auto sales number for April.
Speaker 9: We had it looks like core retail sales will come
Speaker 9: in stronger for April. We know from the public builders
Speaker 9: that April was a very strong month for new home sales.
Speaker 2: So you know, I mean, good, Okay, take me a
Speaker 2: step back. Let's tesus out a little bit. You said
Speaker 2: when you're talking about how the consensus is the consensus
Speaker 2: of a survey of economists, or is the consensus what's
Speaker 2: priced into stock valuations, because they're two different things and
Speaker 2: they haven't been agreeing with each other.
Speaker 9: Well, look, I mean the bond market's also out there
Speaker 9: pricing in rate nuts and I think what like two
Speaker 9: hundred bases points worth of cuts between now and the
Speaker 9: end of next year. I mean, that's hard to see
Speaker 9: in the context of a strong economy, right, so, or
Speaker 9: even an economy that's treading water. I mean, people clearly
Speaker 9: expect some weakness in the economy. I think, you know,
Speaker 9: with respect to equities, I mean, equities are still well
Speaker 9: off the highs obviously. I mean we've seen some rally
Speaker 9: of late. But yeah, I mean, I think you can
Speaker 9: make a case to say that the outlook for stocks
Speaker 9: is somewhat ambiguous, right, I mean, if recession risk gets
Speaker 9: priced out, that should be good for earnings, But at
Speaker 9: the same time, that probably leaves the FED. The prospect
Speaker 9: of the Fed, you know future, right, heakes still on
Speaker 9: the table, which could weigh on stock.
Speaker 2: What will we have to see tomorrow for the CPI
Speaker 2: report to shock this market to say, wait a second,
Speaker 2: we have to start thinking about the FED staying at
Speaker 2: five percent, possibly going up to five point fifty, more
Speaker 2: than rate cuts which are being significantly priced in.
Speaker 1: Well.
Speaker 9: I mean, I do think that the scope for some
Speaker 9: upside surprises on inflation. The question is whether the Fed
Speaker 9: is going to lean into that by continuing to hike
Speaker 9: over the summer. I don't think they will. I think
Speaker 9: that they probably take a pause you know, we have
Speaker 9: you know, essentially they're captured to some extent by events, right,
Speaker 9: I mean the regional banking issues. Obviously there's still an
Speaker 9: issue there. We also have the debt limit negotiations, So
Speaker 9: there are things out there that they can point to
Speaker 9: to kind of keep them away from hiking over the summer.
Speaker 9: But ultimately, I think if the inflation numbers stay relatively firm,
Speaker 9: if the economy is still holding up, we're clearly not
Speaker 9: growing below trend, right the unemployment rate is not going
Speaker 9: to rise as much as the FED expects. Right when
Speaker 9: we're at three point four percent, the Fed's looking for
Speaker 9: a percentage point increase. Bet we're now in the end
Speaker 9: of the year. I don't really see anything in the
Speaker 9: outlook that justifies that kind of a move. So you
Speaker 9: could be well, coming back in September talking about maybe
Speaker 9: they're revising down their unemployment forecast, maybe there taking up GDP,
Speaker 9: and that could you know, push them towards hiking again.
Speaker 2: It's difficult to know what's going to happen in the future.
Speaker 2: It's incredibly difficult to even know what's happening right now
Speaker 2: because the signals are muddied, and perhaps you disagree. I'd
Speaker 2: love the argument, but I do see that, for example,
Speaker 2: the Senior Loan Officer survey to me, even though perhaps
Speaker 2: nothing was that surprising with credit tightening, we did see
Speaker 2: a huge drop off in demand. Again, the c suite
Speaker 2: confidence factor not there or else not willing to pay
Speaker 2: for the credit. And when you look at optimism among
Speaker 2: business executives and anecdotally they say, we are very concerned
Speaker 2: about what's coming down the pike, about inflation, about how
Speaker 2: much we have to pay our workers, about our squeezed margins.
Speaker 2: So how do you pair these ideas with the strength
Speaker 2: that we're seeing in the overall kind of numbers that
Speaker 2: we're getting out of these sort of regular surveys.
Speaker 9: I mean, CEO confidence and business confidence more generally has
Speaker 9: been quite sluggish pretty much since last June, and companies
Speaker 9: have been slowly cutting back cap X inventories have been
Speaker 9: a significant drag on growth over the last year so,
Speaker 9: and consumers have been you know, their confidence has been
Speaker 9: pretty weak also. But ultimately, to me, it's what are
Speaker 9: they actually doing? Companies are still hiring people, right, I
Speaker 9: mean this, you know, these depressed businesses, they're still going
Speaker 9: out and hiring two hundred thousand people a month every month,
Speaker 9: if you know, for the last three months, if you
Speaker 9: I mean, the hiring it rate is basically stable at
Speaker 9: around four percent. You know, see, you haven't really seen, right,
Speaker 9: So there's a disconnect between how people say they may
Speaker 9: feel about things, but what they're actually going on and doing.
Speaker 9: And I'm more concerned about what people are actually doing.
Speaker 2: Although you did see that businesses are not engaging in
Speaker 2: mergers and acquisitions. They're not doing capital expenditures, which directly
Speaker 2: goes into economic trajectory. They're not pulling the deal on
Speaker 2: pulling the trigger on things, right, which has been one
Speaker 2: of the things the reason some.
Speaker 9: Things will get clipped Lisa in a higher interest rate
Speaker 9: environment like M and A. But you know, I mean
Speaker 9: you talk about cap X, I mean talk to I
Speaker 9: mean Boeing orders are going up, right, Boeing production is
Speaker 9: going to go up. That's going to be a huge
Speaker 9: telement for transportation equipment, right, I mean that those are
Speaker 9: capital goods, those are big ticket purchases. So but again,
Speaker 9: it's not that the economy has to be booming here, right,
Speaker 9: So there's this sort of there's this expectation that oh,
Speaker 9: you know, GDP needs to be like three percent. No,
Speaker 9: it doesn't. I mean the issue is where's the consensus
Speaker 9: thinking it's going to be right? And to me, look,
Speaker 9: the FEDS forecast is zero point four percent Q four
Speaker 9: Q four this year. That's highly unlikely just given what
Speaker 9: we have on hand for the for the second quarter.
Speaker 2: We're talking about the short term or the relatively near
Speaker 2: term in terms of growth continuing longer term, there is
Speaker 2: this question of whether we're bringing forward growth, especially in
Speaker 2: light of what everyone loves to talk about, the debt
Speaker 2: ceiling debate, which we've been talking about all morning, and
Speaker 2: this question of whether they're going to be cutting spending
Speaker 2: going forward. How do you sort of pair the short
Speaker 2: term versus the long term, the short term optimism in
Speaker 2: ongoing strength in the economy versus long term perhaps sluggishness.
Speaker 9: Yeah, I mean I think so, right, I mean that's
Speaker 9: I think my primary I guess disagreement with the consensus
Speaker 9: is really over the timing, right. I mean, I don't
Speaker 9: see a recession as imminent. I don't see one as
Speaker 9: likely at any point in the next you know, let's say,
Speaker 9: twelve months. But the FED has told us that they
Speaker 9: believe a period of below trend growth is required to
Speaker 9: quell the inflation issue. So that's where the caution comes from.
Speaker 9: So I think if you want to be honest with yourself,
Speaker 9: you know, ultimately there's going to be some kind of
Speaker 9: economic slump that's out there that the FED will try
Speaker 9: to engineer to bring inflation back towards its target. If
Speaker 9: you really believe in the soft landing at this point,
Speaker 9: you need to be hanging your hat on two things.
Speaker 9: Number one, some kind of productivity boom that brings unit
Speaker 9: labor costs down, or you know, the FED basically accepts
Speaker 9: the higher rate of inflation, and I don't see either
Speaker 9: as as a baseline expectation going forward. So again it's
Speaker 9: it's about the momentum in the economy right now. To me,
Speaker 9: that doesn't speak to a recession. But as I said,
Speaker 9: the FED still believes that below trend growth is required
Speaker 9: to quality inflation issues. So to me, that that that
Speaker 9: leaves you know, you have to kind of stay cautious.
Speaker 9: I mean, I know, it's not it's not. It's sort
Speaker 9: of a it's a difficult environment, I think for for
Speaker 9: investors because it's hard to be sort of sustainable, sustainably
Speaker 9: optimistic on equities here, right, So I think that that
Speaker 9: that's part of the frustration.
Speaker 2: Just before you go, I would love your thoughts on
Speaker 2: the debt ceiling and what we're seeing and the excitement
Speaker 2: that you expect in markets as a response.
Speaker 9: I mean, that's sort of a bit. I mean, I
Speaker 9: think we're going through a very public and open negotiation
Speaker 9: from both sides politically, whether the deadline's actually June first
Speaker 9: or not. I think the House Republicans have done what
Speaker 9: they needed to do. I think the administration is doing
Speaker 9: what they need to do, and I think ultimately there
Speaker 9: will be some sort of negotiation that that that resolves
Speaker 9: the issue. I mean, to me, it's not a binary thing, right,
Speaker 9: I mean, you either go over the cliff or not.
Speaker 9: I suspect they won't, And if they do get to
Speaker 9: a point where they're prioritizing payments, I mean, that'll be
Speaker 9: an opportunity to be buying bonds because I mean basically
Speaker 9: you're basically forcing a recession on the economy over the
Speaker 9: summer at that point.
Speaker 1: So you don't think longer term.
Speaker 2: And this is where I wanted to go, that this
Speaker 2: will reduce the US as ability to borrow cheaply and
Speaker 2: the ability for the dollar to be used globally in
Speaker 2: sort of the.
Speaker 9: What's the alternative, it's what's the alternative? I don't, I don't.
Speaker 9: I mean, this is just I mean to me, it's
Speaker 9: it's it's political rancoring. We'll see, we'll see what happens.
Speaker 9: But I don't. I don't really subscribe to those ideas.
Speaker 2: So is this basically the most fun time you've ever
Speaker 2: had as an economist?
Speaker 9: No, the most fun time actually was one. The job
Speaker 9: was a lot easier in the period immediately following the
Speaker 9: financial crisis, right, I mean, because back then it was
Speaker 9: everyone was looking for recession literally every you know, it's
Speaker 9: around the corner, two years away, and it was never
Speaker 9: it was never really in the cards for that entire cycle.
Speaker 9: And pushing back on that was actually quite easy, and
Speaker 9: the data easily bore that out. Now it's actually quite
Speaker 9: challenging because there are so many mixed signals. And I
Speaker 9: prefer much easier job than not.
Speaker 1: So I think a lot of people would agree with you.
Speaker 1: Neil Zada, thank you so much of renaissance macro research.
Speaker 1: We really appreciate it.
Speaker 2: Helene Becker joins us now to talk about how long's continue,
Speaker 2: whether margins just keep expanding, and when we start to
Speaker 2: get some of the pushback that we heard from the
Speaker 2: likes of President Biden himself yesterday. Helene Becker, Senior research
Speaker 2: analyst at Cowen, so's to start there, why has it
Speaker 2: been that consumers are not pushing back more to these
Speaker 2: incredible price increases.
Speaker 10: Well, I think there are two reasons, Lisa. The first
Speaker 10: is that a year ago, in the first quarter, there
Speaker 10: was still omicron, so that was one issue. And then
Speaker 10: the second issue has a lot to do with summer travel,
Speaker 10: especially international travel, because remember a year ago, the US
Speaker 10: didn't remove restrictions until June eleventh, and a lot of
Speaker 10: people had already missed. Summer trips are planned between mid
Speaker 10: May and mid March, actually the other way around, right
Speaker 10: March in May, and they had already decided where they
Speaker 10: were going, and a lot of stuff wasn't open yet.
Speaker 10: So now everything is open. People are tired of being home,
Speaker 10: they want to travel. They feel like they've missed out
Speaker 10: on a lot in there, and they're going. And you
Speaker 10: have huge, huge demand where we're about equal to where
Speaker 10: we were in twenty nineteen, but we have between ten
Speaker 10: and twenty percent fewer seats available, and the result is
Speaker 10: that with demand, even with business travel and international not
Speaker 10: being one hundred percent back, with demand being so strong
Speaker 10: and exceeding supply, airlines are pushing up bears and we'll
Speaker 10: continue to do so until there's significant pushback.
Speaker 1: And you're not seeing any significant pushback so far.
Speaker 10: I'm not seeing it in the summer months, for sure.
Speaker 10: I'm a little worried about once we get past Labor
Speaker 10: Day in general, because we normally see a dip. But
Speaker 10: also I'm a little worried because I think by then
Speaker 10: people may be exhausted by the prices. And of course
Speaker 10: we don't think this summer is going to be significantly
Speaker 10: better than last summer, especially in the New York area
Speaker 10: where we have a decided lack of air traffic controllers.
Speaker 10: And the government and ask the airlines if they would
Speaker 10: help by reducing capacity in the market. And most of
Speaker 10: the airlines who are operating now have employment that exceeds
Speaker 10: their pre pandemic levels, so the airlines were ready, the
Speaker 10: government is not.
Speaker 2: How much are we looking at a real divergence between
Speaker 2: the international airlines versus the more domestic airlines, And I ask,
Speaker 2: with also a focus on first class, which is commanding
Speaker 2: the biggest premium in years relative to economy. How much
Speaker 2: is really the gains that we have seen entirely driven
Speaker 2: by that international flight path the traveler that has that
Speaker 2: much more discretionary spending.
Speaker 10: So, Lisa, we're seeing international outbound very strong from the US,
Speaker 10: I think because the dollar has been relatively strong. Inbound
Speaker 10: we're still down versus where we were, but outbound were above.
Speaker 10: So I think that's one thing. I think the other
Speaker 10: part of your question with respect to how the divergence
Speaker 10: between the two, you know, I think that's definitely a
Speaker 10: summer twenty twenty three event, maybe into twenty four when
Speaker 10: you get to Asia Pacific which is reopening now, and
Speaker 10: then domestic, I don't know. Maybe people will be so
Speaker 10: overwhelmed by the price of some tickets that they'll pivot
Speaker 10: and either shift days that they travel, or shift location
Speaker 10: instead of going to Europe because fares are so high,
Speaker 10: maybe go to Latin America, Northern South America. Domestic, I
Speaker 10: think you'll see some of that pivoting because of the
Speaker 10: differential in fairs.
Speaker 2: Do you think that there's going to be some sort
Speaker 2: of decline in business travel or is it coming back
Speaker 2: nearly to the level that it was pre pandemic or
Speaker 2: even more because people are just working from home and
Speaker 2: then traveling right.
Speaker 10: So I don't know the specific answer to that question,
Speaker 10: because my thought has been that business travel will come
Speaker 10: back in different measures, so you need to see your
Speaker 10: clients after a while. Zoom calls don't cut it. Number one.
Speaker 10: Number two, when you get to time zone differences. It's
Speaker 10: one thing to be US East Coast to London or
Speaker 10: western Europe, where you're dealing with a five or six
Speaker 10: hour time change. You can kind of make that work.
Speaker 10: But when you start to get into the nine hour
Speaker 10: time changes that exist in the middle of the East,
Speaker 10: or fifteen hours or twelve hours that exist to Asia, Australia, Japan,
Speaker 10: I think people realize it's hard to do zoom calls
Speaker 10: at one o'clock in the morning for somebody while they're
Speaker 10: doing these calls. So I think at some point it
Speaker 10: does start to come back. We've thought that it would
Speaker 10: be international business would be would come back faster than domestic,
Speaker 10: But I think the days of if it's Tuesday, it
Speaker 10: must be Rome kind of thing are past us, and
Speaker 10: to the extent you might have a meeting that would
Speaker 10: be three hours long. You can probably get away with
Speaker 10: a one hour or two one hour zoom calls, not
Speaker 10: necessarily back to back. But I remember days when I
Speaker 10: flew to London for due diligence and flew home the
Speaker 10: next you know, the same day, land in the morning,
Speaker 10: fly home at night. I mean, that kind of stuff
Speaker 10: isn't happening anymore.
Speaker 2: How much are we seeing, actually the resurgence of the
Speaker 2: Chinese economy percolate into air travel.
Speaker 10: Yeah, not yet. So what you're seeing is what we
Speaker 10: experienced in the US. You see domestic first, So Golden Week,
Speaker 10: as I understand it was fairly strong. We should get
Speaker 10: the numbers tonight or tomorrow, but last week was a
Speaker 10: very strong week for them. Domestic international hasn't come back
Speaker 10: yet because the flights haven't come back. In twenty sixteen,
Speaker 10: there were over one hundred flights a week between the
Speaker 10: US and China and more between China and Europe, and
Speaker 10: now there are fourteen between the US and China. So
Speaker 10: flights haven't come back yet. And until that happens, which
Speaker 10: was probably a twenty four event at the earliest, given
Speaker 10: the political situation, maybe even later. I don't think you're
Speaker 10: going to see that that dynamic come back. From a
Speaker 10: tourist perspective, I think what you'll see, and what you're
Speaker 10: probably seeing right now is family travel people who haven't
Speaker 10: seen family in a couple of years because of the
Speaker 10: Chinese COVID policy which had the country virtually shut down.
Speaker 10: I think you see students making their way back home
Speaker 10: who maybe were trapped outside of China. But I think
Speaker 10: it's domestic is where you're seeing the strength versus international.
Speaker 2: Just real quick, here we see oil prices coming down,
Speaker 2: which means that a lot of the margins probably will
Speaker 2: only expand. At what point do the widening margins become
Speaker 2: a political liability for some of the airline companies that
Speaker 2: are facing a lot of criticisms about the experience.
Speaker 10: Yeah, I think that's a great question, Lisa. So I
Speaker 10: think a couple of things. Fuel prices come down, typically
Speaker 10: ticket prices follow with something like a three to four
Speaker 10: month lag in both directions. So that's one thing to
Speaker 10: think about. Oil prices come down. If oil prices are
Speaker 10: coming down because we're in a recession, that should bring
Speaker 10: ticket prices down as well, maybe take some of the
Speaker 10: pressure off the airlines. The airlines do a really good
Speaker 10: job this summer, probably remove some political pressure. I mean,
Speaker 10: the airlines are one of those industries everybody loves to hate,
Speaker 10: and even though it brings people together, even though to
Speaker 10: have a good economy you need a robust airline industry,
Speaker 10: it's one of those industries everybody likes to pick on,
Speaker 10: and so they really need to do a better job
Speaker 10: than they're doing. And I think you'll I mean, I
Speaker 10: guess we're kind of hoping all that that's not a strategy.
Speaker 10: I think we're thinking that as they invest in technology,
Speaker 10: things will start to improve for them. But certainly the
Speaker 10: lack of seats is a problem in terms of recovery
Speaker 10: from irregular operations. So a lot, kind of a lot
Speaker 10: to unpack there. At least that you asked a great question.
Speaker 1: Well thanks, Elaine Becker of Gowan.
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Speaker 1: I'm Lisa Abramowitz and this is Bloomberg