Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Tom Keene along
Speaker 2: with Paul Sweeney. Join us each day for insight from
Speaker 2: the best in economics, finance, investment, and international relations. You
Speaker 2: can also watch the show live on YouTube. Visit the
Speaker 2: Bloomberg Podcast channel on YouTube to see the show weekday
Speaker 2: mornings from seven to ten am Eastern from our global
Speaker 2: headquarters in New York City. Subscribe to the podcast on Apple, Spotify,
Speaker 2: or anywhere else you listen and always I'm Bloomberg Radio,
Speaker 2: the Bloomberg Terminal, and the Bloomberg Business App. Joining us
Speaker 2: here is Na Seen teleb and Scott Patterson and celebration
Speaker 2: of a brutal book. I really can't say enough about
Speaker 2: this for Global Wall Street. I'm sorry. This is the
Speaker 2: adult of book Chaosis, Bill Cohen, William Cohen. He wrote
Speaker 2: a book about Duke Lacrosse. It was Bill Cohen, just
Speaker 2: says Scott Patterson. He's done it again, which he did
Speaker 2: in twenty twelve, and with Dark Pools and all that.
Speaker 2: And the problem we got here, David is we can
Speaker 2: spend the next three hours of tleeb but you know
Speaker 2: we got to give some love here to Scott Patterson,
Speaker 2: who's only here because James Madison University beat Chapel. That
Speaker 2: happened your book. In full disclosure, I'm totally in that
Speaker 2: seems camp and knows that like Wicked in his camp.
Speaker 2: So when you set up your book, which is the
Speaker 2: TALEB team like JMU against the other teams, some French
Speaker 2: dude like unc, how did you set up that polarity?
Speaker 2: Describe the tension of chaos kings?
Speaker 3: Yeah, well, it seems belief is that you can't predict markets,
Speaker 3: so you just need to prepare for extreme events all
Speaker 3: the time, the black Swans, and I can't trast that
Speaker 3: with another character, a French econophysicist named Didier Sornette who
Speaker 3: uses advanced physics and other mathematical models to try to
Speaker 3: predict these big advance He calls them dragon kings, which
Speaker 3: technical term. Yeah, yeah, I call it Newtonian envy. So
Speaker 3: he's a math guy, right, Yeah, he's a math guy.
Speaker 3: He uses some things that could be used to predict
Speaker 3: the explosion of rockets and transpose that onto financial markets.
Speaker 2: You gotta be kid, here's the reality, folks now seeing
Speaker 2: tallav changed the world with John and nero and fooled
Speaker 2: by randomness. Everybody else would have retired to turks and
Speaker 2: caicos or whatever. He went on to do Black Swan.
Speaker 2: And then you and I sat on the stairs of
Speaker 2: Saint Bart's on Park Avenue, and you described anti fragile
Speaker 2: to me. Now, seeing where is the humility among the
Speaker 2: quants in this great boomer.
Speaker 4: The point is you don't need humility. Humility actually is
Speaker 4: not necessary. I don't why people are arrogant. There's just
Speaker 4: got to be paranoid about the right things, namely, how
Speaker 4: much our error costs you when it happens that ruined problem,
Speaker 4: and and and and basically Scott's book is about ruined problems.
Speaker 4: Let's see. So you could be arrogant about everything, all right,
Speaker 4: You could be wrong all the time, doesn't matter. You
Speaker 4: gotta avoid You got to avoid ruin the big things.
Speaker 4: You've got to be right about the big sources of risk,
Speaker 4: and and and the rest take care of itself.
Speaker 5: Could could I get your having come out of the pandemic,
Speaker 5: your perspective on what happened there largely but within markets
Speaker 5: as well, the reaction to what we.
Speaker 4: Saw, you mean, the pandemic, the reaction to it. Yeah, okay,
Speaker 4: we we were. I mean Scott discusses what happened in
Speaker 4: the pandemic and and and how we were sessing over it.
Speaker 4: I mean when we started the idea of universal. When
Speaker 4: Mark started Universal, I was a passenger, you know, I
Speaker 4: was a retired passenger. But the name universa means universal properties.
Speaker 4: And we're talking about some universality of these classes of
Speaker 4: tail uh processes that generate large tale events, and we
Speaker 4: call them, I call them grace WANs. Hence that that's
Speaker 4: where the name universe came from. So the the we were,
Speaker 4: I was obsessing even when I wrote the blacks one
Speaker 4: about pandemics, and kept obsessing and they said, okay, I
Speaker 4: didn't remember the interview. Someone asked me, what what you
Speaker 4: have to worry about this? And that no, you can't.
Speaker 4: To worry. First thing about some germ traveling on air France.
Speaker 4: Air France, you get good food and if they're bad germs,
Speaker 4: they travel along British air or they get bad food.
Speaker 4: So that was and sure enough nothing had happened since
Speaker 4: for one hundred years, or for close to one hundred years, right,
Speaker 4: So and people say, well, you know, just like financial risks,
Speaker 4: you know, people the perception for before the crisis say, oh,
Speaker 4: we don't have to worry about these they don't happen anymore.
Speaker 4: Sure enough, All.
Speaker 2: Right, Scott Patterson, you've got you know, one of the
Speaker 2: sections is the Boston section that we could problem and
Speaker 2: the answer is flying blind. I mean, you've been doing
Speaker 2: this for fifteen years at the Wall Street Journal, trying
Speaker 2: to figure out the mathiness and the certitude. And I'm
Speaker 2: gonna wake up and win. We're gonna we're number six,
Speaker 2: We're gonna be number two or number one. What are
Speaker 2: we flying blind on right now?
Speaker 3: I think that you know, right now, there's obviously a
Speaker 3: huge amount of complacency in markets. Yeah, you know, we're
Speaker 3: hitting records time after time, and yet you look outside
Speaker 3: Wall Street and it looks pretty crazy. So there's all
Speaker 3: sorts of things that can happen. And I know Naim
Speaker 3: wants to talk about China. I've been predicting China would
Speaker 3: collapse for two decades now, and they don't.
Speaker 2: Right careful cash flow lives there. My oldest son speak
Speaker 2: care of China's not going to collect. Let's do this,
Speaker 2: We do China. David Gurr in the next section, Okay,
Speaker 2: we're go an extended conversation when NA see teleb and
Speaker 2: Scott Patterson Chaos Kings is a book. Okay, you know
Speaker 2: I asked that question to Scott. I seem to set
Speaker 2: you up here. We're flying blind, Na seeing teleb and
Speaker 2: private equity in private credit.
Speaker 4: It's all the rage, Okay. The first thing I have
Speaker 4: to say that we have a that problem in the West. Okay,
Speaker 4: whether in the visual government, you know, you can have that.
Speaker 4: China has that, but you must grow. And the problem
Speaker 4: of the West is that we have an escurve of
Speaker 4: growth or GDP or per capita and look like we're
Speaker 4: at on the top right of that curve. So it's concave.
Speaker 4: And people have two cars, they have two homes, and
Speaker 4: what do they want, I mean, have perier watership to them.
Speaker 4: I mean, so the incentive to grow isn't there. So
Speaker 4: here it's a serious problem when you have low growth
Speaker 4: and a lot of that. And the problem is that
Speaker 4: Western Uh. You know, economies have never had more debt
Speaker 4: in history as a time where gross became concave simply
Speaker 4: the nature of gross. You grow fast when you're China,
Speaker 4: because you've got to pull people out of the provinces
Speaker 4: and stuff and centers of living can still rise and
Speaker 4: make a difference now.
Speaker 2: So they're not quants of credits sweet years ago. There,
Speaker 2: our listeners, our viewers there, they put their pants on
Speaker 2: one leg at a time. How did they hedge against
Speaker 2: your concave tensions that we're in right now? How do
Speaker 2: near mortals head?
Speaker 4: Okay, the whole thing is, it's not you hedge. If
Speaker 4: you're investing without a tail headge, you're practically not investing
Speaker 4: because of the ruined problem. And that's what he discusses
Speaker 4: in the book. That's my first statement and the second
Speaker 4: one that people are way too static. They imagine either
Speaker 4: they have a memory that's that's either too short or
Speaker 4: or or has problems updating that they don't realize that,
Speaker 4: for example, what's happening in China that the Nature index
Speaker 4: of publications that's very hard to gain. What China used
Speaker 4: to have one percent today it's in the twenties and
Speaker 4: rising so tells you that that's a leading indicator of
Speaker 4: what technologies may come out of China. So you realize that,
Speaker 4: get a look back before seventeen fifty around when the
Speaker 4: industry revolution started. Starting the show, so we're starting to
Speaker 4: shift and in eighteen thirty TRYINGA had eight times the
Speaker 4: GDP of Brittain. We're back there as soon it's gone.
Speaker 4: So we're going back now in times like reversing the
Speaker 4: Dominus of the West, not because the West is doing poorly,
Speaker 4: but because it got one work.
Speaker 2: David, We're going to China right now now seems to
Speaker 2: running the show. We're doing China here right now we'll
Speaker 2: do with the stock market opening your Foremanu's David Gern
Speaker 2: China with Scott Patterson. Well now seeing.
Speaker 5: Steth, let me ask you more about you said you've
Speaker 5: been predicting the sort of dissolutionally been seeing for for
Speaker 5: twenty years. What stands out to you about this moment.
Speaker 5: We've spent the whole week talking about these kind of
Speaker 5: unprecedented actions, the way they were delivered by the PBOC
Speaker 5: in China. What that says about the actual state of
Speaker 5: the economy there. Talk a bit about that and sort
Speaker 5: of your your vantage of it, and also just sort
Speaker 5: of how much varacity we can ascribe to the statistics
Speaker 5: that we're getting out of China.
Speaker 3: Well as to the veracity of the statistics. Who knows,
Speaker 3: you know, they keep doing this, they keep they hit
Speaker 3: a slow down and then they you know, hit the accelerator.
Speaker 2: They've pulled.
Speaker 3: You know, after the GFC, a great financial crisis, China
Speaker 3: pulled the entire world out of that situation by stimulus.
Speaker 3: You know, who knows how long they can keep it up.
Speaker 3: It's a big mystery for me. You know, my focus
Speaker 3: these days is on climate and the dominance of China
Speaker 3: and climate technology is astonishing, and that's the future of energy,
Speaker 3: it's the future of vehicles, it's the future of batteries.
Speaker 3: And they're you know, light years ahead of everybody. We're
Speaker 3: trying to catch up. Europe's trying to catch up, and
Speaker 3: that for China is a big, big advantage.
Speaker 2: I got to do a shout out here with the
Speaker 2: Wall Street Journal this week with a stunning effort, China's
Speaker 2: newest nuclear submarine sank, setting back its military modernization. That
Speaker 2: was an incredible story. Out of your shop. Now on
Speaker 2: China again, continue, Aaron Friedberg for Foreign Fair says it's
Speaker 2: a Marxist Leninist regime. Nobody in Beijing read fooled.
Speaker 4: By randomness now. But the point is the point is
Speaker 4: that China is in reverse. Is the reverse of Europe.
Speaker 4: If you're small in China, you can do whatever you want.
Speaker 4: If you're big, the government calls you up for a meeting.
Speaker 1: Right.
Speaker 4: So in Europe, if you're small, you're overregulated. You got
Speaker 4: you got like five tax inspectors breathing down your neck.
Speaker 4: You've got to get all these permits. If you're big,
Speaker 4: then you own the government, okay, particularly the case in
Speaker 4: France and Germany everywhere and practically everywhere in Europe. So
Speaker 4: China is a reverse. So they say, okay, it's capitalism
Speaker 4: okay for the small and communism for the large, and
Speaker 4: its effectively it's not that much that there's you know,
Speaker 4: a centralized economy except for the top.
Speaker 2: So what about America into our fractured election.
Speaker 4: Okay, I don't know about whether the election makes it
Speaker 4: different and uh in many respects. But we have a problem.
Speaker 4: And that problem is that our death servicing is increasing,
Speaker 4: and I guess that you cross is more than military
Speaker 4: spending is more already okay, so and and it will
Speaker 4: continue to pay interest on that. Now you may say
Speaker 4: interest rates may be lower. I don't think we can
Speaker 4: go back to zero interest rate because zero interest rates
Speaker 4: gallas here, all right, so we're going to go back
Speaker 4: to normal interest rates. So the death problem is not
Speaker 4: going to go away. That service is going to keep increasing.
Speaker 4: And and the problem is if the East becomes and
Speaker 4: that's just China, just the East in general becomes powerful
Speaker 4: and and becomes a target of you know, retirement money
Speaker 4: and stuff like that, then the dollar would be in trouble.
Speaker 2: Michael Mobison with us two days ago and nussing teleb
Speaker 2: today was Scott Patterson and celebration of chaos King Scott,
Speaker 2: what's the other side of the story here the mathewness
Speaker 2: and certitude of Zurich, Switzerland.
Speaker 3: Yeah, you're referring to Didder Sournett, the Dragon Kings guy.
Speaker 3: You know, I we were talking about China, predicting what
Speaker 3: happens in China. I just you know, after covering financial
Speaker 3: markets and talking to you know, hedge fund managers who
Speaker 3: twenty years ago were billionaires and now they're you know,
Speaker 3: buzzing tables at diners. I you know, this is where
Speaker 3: I come down on the Seams side is I don't
Speaker 3: think you can predict markets. I think it's impossible. I
Speaker 3: think that they're you know, when you look at quant
Speaker 3: trading strategies are very short term, like over the course
Speaker 3: of a few minutes and seconds. Those are the only
Speaker 3: strategies that really survive long term. And even they you know,
Speaker 3: my first book The Quants showed how they almost blew
Speaker 3: up in the two thousands in a period of big
Speaker 3: d leveraging.
Speaker 4: So basically they're basically getting a higher dimensional bit than mask.
Speaker 2: Okay, yeah, they're trading.
Speaker 3: Didn't asked very rapidly, and that's that's good strategy. But
Speaker 3: you know, trading making big bets on your prediction of
Speaker 3: what China is going to do next quarter, next year,
Speaker 3: or you know what the Fed is going to do,
Speaker 3: This is very very.
Speaker 2: Hard to do. My humility or David Gray is it's
Speaker 2: a once in a lifetime event. And you know, years
Speaker 2: ago in the old world, which is where tab is from,
Speaker 2: you know, eleven Aine and all that, and over to
Speaker 2: the continent of Europe. You know, they're laughing at us
Speaker 2: about once in a lifetime event. You and I have
Speaker 2: gotten Gray doesn't eve any great. But the answer is
Speaker 2: there's a lot of once in a lifetime events.
Speaker 5: David, I have a question about young people in this industry,
Speaker 5: and it's inspired by a conversation. I had to my
Speaker 5: and Robert Smith, who is at NPR. He's now running
Speaker 5: the Night Badge of program at Columbia. I said, I
Speaker 5: was gonna be talking to you today and he said,
Speaker 5: here's what you should ask him. He pulled up a
Speaker 5: tweet that you filed more than a year ago. Now,
Speaker 5: the story we haven't covered this week is Caroline Ellison
Speaker 5: of FTX getting sentenced, going to spend two years in prison,
Speaker 5: and you tweeted about Sam Begmanfreed when everything blew up.
Speaker 5: He said, the problem with people like SBF is knowing
Speaker 5: the tiny bit of statistics to pairrot about it, but
Speaker 5: not understanding processes. That is dynamics, cross time. Shakespeare has
Speaker 5: survived nearly half a millennium by filtering by time. Then
Speaker 5: you close, Sam Begnfreed worked at Jane Street. You're right
Speaker 5: to Jane Street. He would have flunked my job interview.
Speaker 5: What does the Naseem teleb job interview look like? What
Speaker 5: do you ask somebody's applying.
Speaker 4: For understand some basics things like ruined problems and understand dynamics.
Speaker 4: So which is the same. You know that people if
Speaker 4: you have probability of losing money, eventually would go out
Speaker 4: of business, okay, over time. So if you're aware of it,
Speaker 4: that's fine. If you're not aware of it, you've got
Speaker 4: a problem. The other one is sizing comes from sizing. Also,
Speaker 4: if you have the edge, you still have probably one
Speaker 4: hundred percent of blown up if you don't size properly.
Speaker 4: So sizing is very delicate. Two basic things, And the
Speaker 4: third one is about fat tales, the difference between tin
Speaker 4: tails and fat tails. That's pretty much the theme of
Speaker 4: the Black Swan, the remedy and anti fragile and discussion
Speaker 4: of white people don't understanding and skinning the game. Okay,
Speaker 4: so the difference between fat tail and thin tail finance
Speaker 4: is not Gaussian. Now everybody claims, yeah, we know that. Yeah,
Speaker 4: if you know that, then why are you using Gaussian tools?
Speaker 4: What tools do you use? What do you suggest people
Speaker 4: in the street understand the parreto eighty twenty? It is
Speaker 4: very intuitive. You need to learn to know some mass,
Speaker 4: but not enough, okay to get to stuck to you know,
Speaker 4: if you teach people a little bit of math but
Speaker 4: not enough, they go to the coe.
Speaker 2: This not Sing's laughing at me here right now because
Speaker 2: he knows it to Thudau, David, thank you, Kerr and
Speaker 2: I don't speak before the show. In fact we're not
Speaker 2: on speaking terms. But I'm so I brought that up.
Speaker 2: Not seem fine, you know me on position sizing. Position
Speaker 2: sizing is everything, and right now we're living in a
Speaker 2: MAG seven world where everybody, whether they admit it or not,
Speaker 2: is Scott Patterson's four oh one k at the Journal
Speaker 2: is loaded up with Nvidia and all the rest of
Speaker 2: it not seeing tell out on Mag seven the anti
Speaker 2: position sizing.
Speaker 4: Okay, so I let me give you one one thing
Speaker 4: since I don't have a lot of things. Yeah, I read.
Speaker 4: I wrote a tweet saying that if someone gave you
Speaker 4: twenty four hours in advance the newspaper tomorrow's newspaper, that
Speaker 4: you would go bust. And actually someone just tested it.
Speaker 4: Victor Hagani Formative LTCN, who visibly no has long experience
Speaker 4: in the market, has tested it by giving people over
Speaker 4: fifteen years next day's the newspaper and tell and giving
Speaker 4: them you can trade that today's price, knowing towards newspaper,
Speaker 4: and people didn't do well. Why One of it is,
Speaker 4: of course sizing. They don't know how to size the
Speaker 4: position right, whether whether they're right. They don't know how
Speaker 4: right they are because they can't figure out how much
Speaker 4: of it is noise, all right, and of course the sizing.
Speaker 4: So so the just you know, I heard of the
Speaker 4: paper yesterday because it starts with my tweet. It's interesting
Speaker 4: to have a tweet turning into a paper by someone else,
Speaker 4: like for someone lazy like me, it's perfect, right because
Speaker 4: tweets I don't an airport's typically right, So.
Speaker 3: And that's not that's not how markets work. The markets
Speaker 3: work on anticipation of news events. Oftentimes, when you you know,
Speaker 3: you see the Fed cut interest rates, the marketer go down, Yeah,
Speaker 3: because it's already traded on that news.
Speaker 4: There's a fact Tony story and anti a right, how
Speaker 4: people who anticipated the invasion of Iraq or the starting
Speaker 4: of the war against Saddam in nineteen ninety one, those
Speaker 4: what dissipated It went bust because guess what happened to
Speaker 4: oil prices? They collapsed, all right. So it's not figuring
Speaker 4: out the news. There's something more subtle about markets.
Speaker 2: I want to get one more question in a kiss
Speaker 2: Kings and Nassin, then we've got to talk to you
Speaker 2: about it. Fractured your old World, your Europe with one,
Speaker 2: two three. They're calling them conflicts, but I think there
Speaker 2: was Skim Patterson, you have such a history of writing
Speaker 2: of the tension of Wall Street in your experience. Is
Speaker 2: anybody on Wall Street putting the tension and the outcome
Speaker 2: of it of your books into practice or we still
Speaker 2: what a to var which I know Nasim loves var.
Speaker 2: Is anything changed on Wall Street?
Speaker 3: I think that's it's funny. No, I don't think that
Speaker 3: we learn our lessons. I think people are still using
Speaker 3: value at risk even though it just got just I
Speaker 3: mean it was a laughing stock.
Speaker 2: In two thousand and eight.
Speaker 3: People looked at this and like this is insane. We're
Speaker 3: cutting out five percent of the worst days every year,
Speaker 3: and like that doesn't matter. So yeah, no, I don't
Speaker 3: think we learned less I wanted to come back to
Speaker 3: the question of an interview asking, you know at a
Speaker 3: hedge fund. Yeah. I spoke to a while back somebody
Speaker 3: who you know at Renaissance Technologies and the big quant
Speaker 3: Shop of Long Island. One of the questions they asked
Speaker 3: perspective employees is how does the toilet work? Which you
Speaker 3: know you're talking about dynamics. I thought that that's an
Speaker 3: inod question interesting and the answer is to vacuum.
Speaker 2: I want to devote the rest of the time with
Speaker 2: great honor to all the people from Lebanon that have
Speaker 2: assisted David ger and I and what we've seen over
Speaker 2: the last weeks, days and Indian quarters and years led
Speaker 2: by Jumana Bricchecci over in Dubai, who has been really
Speaker 2: helpful to us here. Her show is Horizon out of Dubai.
Speaker 2: Look for that now, seeing you have lived this, you
Speaker 2: were in your family or deputy prime ministers, you were
Speaker 2: involved with it. Out of the Greek Orthodox Christian sphere
Speaker 2: of a Lebanon I remember with great prosperity, it is shattered.
Speaker 2: What did you not know?
Speaker 4: I mean, I was in Lebanon two weeks ago, and
Speaker 4: I go to Lebanon, I reside there part of the time.
Speaker 4: So what you see in pictures isn't doesn't map to
Speaker 4: any when you hear about the economy, doesn't map to
Speaker 4: what's going on there. There've been a little slowed down
Speaker 4: by the slowed down by the Gaza War, some kind
Speaker 4: of rise and across all economic sectors in Lebanon On
Speaker 4: a more anti fragile basis. In other words, the collapse
Speaker 4: of the government of Lebanon economically gave rise to central
Speaker 4: large municipal power and to a lot more entrepreneurship. Okay,
Speaker 4: because the central bank was conducting a ponzi and the
Speaker 4: ponzi went away, and then suddenly people recovered and four
Speaker 4: years later, you know, it's on amend and and you
Speaker 4: can see economic activity across all sectors. I mean, restaurants
Speaker 4: are all full, new restaurants opening up like every day,
Speaker 4: at least in my in my my neighbor is like
Speaker 4: forty to fifty past year, I mean every day every week.
Speaker 4: So so you have you have. So what the perception
Speaker 4: of Lebanon from from the outside is quite distorted, given
Speaker 4: that I spent time there the this war, I think
Speaker 4: is I mean, there there is a problem. Okay, let's
Speaker 4: let's say there is a problem. The fighting is confined
Speaker 4: to Hizballah and the State of Israel. But but but
Speaker 4: of course their side effects outside. But something tells me
Speaker 4: that that if you go to a bigger war, if
Speaker 4: Israel wants to drive the US and too a that war,
Speaker 4: and then then then think would would would blow up?
Speaker 2: David? Yeah, David. One final question, how.
Speaker 5: Do you engage the prospects of that happening.
Speaker 4: I think that the Yes is resisting and the Iranians
Speaker 4: are trying to be nice, and there is a more
Speaker 4: considerate tone here, so we'll see, we'll see. I mean,
Speaker 4: from there, you can see how irrational would be for
Speaker 4: everyone to get involved in broader war, particularly that long
Speaker 4: term it's not going to help me, think about it.
Speaker 4: Israel had with his Balla in two thousand and six,
Speaker 4: they got stronger, they they had they occupied the southern
Speaker 4: Lebanon and and has been stronger and stronger. So every
Speaker 4: every war is just like delayed training program for for
Speaker 4: his Ballad. So Israel doesn't have it's in its own interest. Okay,
Speaker 4: you can't destroy a you can't destroy you know, a ideology.
Speaker 4: You can you can destroy military installations.
Speaker 2: Coughing on Ariston. We got to leave it there rather
Speaker 2: not seeing teller. Thank you so much. One of the
Speaker 2: protagonists of Chaos kings how Wall Street traders make billions
Speaker 2: in the new age of crisis. Scott Patterson, thank you
Speaker 2: so much for coming to today. This is a really
Speaker 2: really important book for global Wall Street. Not so much
Speaker 2: what to do, but what not to do. Scott Patterson's
Speaker 2: Chaos Kings setting up attension between two giants of investments.
Speaker 2: Dying to talk to Lindsey Piggs up of Steve Wall
Speaker 2: she's really pushed against soft landing certitude, Doctor PAGs is
Speaker 2: thank you so much for joining Bloomberg's surveillance. How remote
Speaker 2: is a soft landing?
Speaker 1: Well, I think it's still a possibility. It's still out
Speaker 1: there as a potential for the economy, but it is
Speaker 1: going to be challenging for the FED to achieve that. Remember,
Speaker 1: part of the soft landing is instilling price stability on
Speaker 1: a sustained basis, So getting us back to two percent,
Speaker 1: not just touching it, but maintaining that along with the
Speaker 1: prospect of avoiding a downturn. Now, I do think on
Speaker 1: the growth set, on the growth side, at least in hindsight,
Speaker 1: the US economy remains on solid footing. But I'm not
Speaker 1: convinced that the FED has the focus, has the stomach
Speaker 1: to get us back to two percent. They feel they
Speaker 1: seem to be very complacent at this point with this
Speaker 1: very tepid, somewhat sideways and uneven movement in inflation.
Speaker 5: At this point, I know they would beg to differ
Speaker 5: We have heard such adamant from the FED chair about
Speaker 5: that two percent target, but it raises this larger question
Speaker 5: of when do we get there. There will be no
Speaker 5: declaration of victory, of course, but what's it going to
Speaker 5: take for you to say, look, mission accomplished, Pick your trope.
Speaker 5: The FED has been able to win this fight.
Speaker 1: Well, that's right. The Fed's forecast does not look for
Speaker 1: two percent on a sustained basis until twenty twenty six,
Speaker 1: so some two years from now. But in order for
Speaker 1: me to get an increased level of confidence that we
Speaker 1: will get there eventually, is further meaningful progress. Now, this
Speaker 1: morning's report was encouraging when we look at the headline number,
Speaker 1: but the core, after several months of sideways movement, has
Speaker 1: now ticked higher. So we're moving in the opposite direction
Speaker 1: of that two percent price level. And you have to
Speaker 1: couple that with the lack of movement that we saw
Speaker 1: on the core PPI, the core CPI. So there's a
Speaker 1: number of key inflation metrics that are showing no further improvement,
Speaker 1: offering no further confidence to the FED that we are
Speaker 1: on a sustainable disinflationary trend. So I do find myself
Speaker 1: in the camp of the sole descent into some Michelle
Speaker 1: Bowman saying, no, there's still inflationary risks out there, there's
Speaker 1: upside risk potential, and we need to stay focused on
Speaker 1: that inflation component of the dual mandate.
Speaker 5: Lindsay, if you and I were in the Echos building
Speaker 5: looking at that dashboard, looking at all of these data
Speaker 5: in complement, what is what is or what are the
Speaker 5: types of data that stand out the most of you?
Speaker 5: Is most important here as we move ahead?
Speaker 1: Well, I think as the FED is looking at the
Speaker 1: key data points are the inflation data and the reads
Speaker 1: on the labor market. But what's interesting is when we
Speaker 1: look at the labor market data, independent of any commentary
Speaker 1: from the FED or the media of the market, the
Speaker 1: labor market is still near full employment. The unemployment rate, yes,
Speaker 1: has ticked up from a low level, but we're still
Speaker 1: at four point two percent, well below what the FED
Speaker 1: designates as that full employment range, the desirable or sustainable
Speaker 1: level of joblessness. Jobless claims have not ticked any higher.
Speaker 1: So the other side of the inflation excuse me, the
Speaker 1: other side to labor equation, job destruction, is not seeing
Speaker 1: any side movement. We're still talking about over seven million
Speaker 1: job vacancies, and on average we're still creating over one
Speaker 1: hundred and eighty thousand new payrolls month to month. So
Speaker 1: that's still indicative of a tight ish labor market.
Speaker 2: If you're joining us, Lindsay, Pie is Steefel thrilled that
Speaker 2: she's with us today. After this report, it lifts the
Speaker 2: market quiescent CPI pce I should say price index futures
Speaker 2: up three now up nine, NASTAC up thirty five points
Speaker 2: two tenths of a percent, Small cap leads away up
Speaker 2: a solid nine tents of a percent. The fix comes
Speaker 2: in ever so slightly fifteen point twenty nine. Looking at
Speaker 2: the yield space ten year yield three point seven seven
Speaker 2: and three basis points. I always look at the ten
Speaker 2: year real yield one point six to zero comes in
Speaker 2: two basis points, sort of inconsequential. It's now time for
Speaker 2: the math portion. We do this with pigs of Stepheljo.
Speaker 5: You're gonna get a coffee.
Speaker 2: Well, yeah, Lindsay, I'm going to cut to the chase
Speaker 2: from the cheap cheap to the high fed funds rate.
Speaker 2: We have a belief in eight nine ten rate cuts
Speaker 2: to come to get back to the center tendency two
Speaker 2: point eight ish, two point nine ish, maybe three percent
Speaker 2: as well. To me, it's wildly nonlinear. Aren't the next
Speaker 2: twenty five, twenty five or fifty base point sort of
Speaker 2: a non event and the real sweat for the FED comes, say,
Speaker 2: the spring of twenty twenty five.
Speaker 1: Well, yes, in the longer term and in terms of
Speaker 1: the longer term timeline for getting us back to neutral.
Speaker 1: But I would push back and say that the next
Speaker 1: two meetings are going to be key in terms of
Speaker 1: setting the tone for the Fed's willingness to remain data dependent.
Speaker 1: If we see a stronger than expected labor report coupled
Speaker 1: with this morning somewhat disappointing move in the core PCE,
Speaker 1: I think the FED is going to have to respond
Speaker 1: with a much smaller rate cut or a potential snip
Speaker 1: of a meeting. And if they don't, that's going to
Speaker 1: send the message to the that maybe they're less data
Speaker 1: dependent than they're indicating, and they are on somewhat of
Speaker 1: a blind sided focus to get us back to a
Speaker 1: particular position in policy, regardless of what the data is saying.
Speaker 2: Across the history of the FED, and particularly the more
Speaker 2: modern FED, which labor statistic really matters. Is it non
Speaker 2: farm payrolls? Is it the unemployment rate? Is it something
Speaker 2: David Gerrin, Tim King don't understand.
Speaker 1: I think the Fed is going to look at a
Speaker 1: number of factors, but if we had to look at one,
Speaker 1: it's going to be the unemployment rate. It's going to
Speaker 1: be that fluctuation into or are still away from the
Speaker 1: full employment range. Now, the non farm payroll number certainly
Speaker 1: seems to set the tone for market expectations, but when
Speaker 1: it comes to monetary policy, the Fed officials typically focus
Speaker 1: on that unemployment number to really gauge what the momentum
Speaker 1: is in terms of labor market conditions.
Speaker 2: Sure, there're folks really really important, David, I'm going to
Speaker 2: segue you in. Folks again, we're commercial free for cross
Speaker 2: this hour on a PCE statistics. Market lifts on it
Speaker 2: as well. We thank all of our good sponsors for
Speaker 2: allowing us to do this. David Gerra anam Wong at
Speaker 2: Bloomberg Economics, and she pushes against doctor Piegso there's no
Speaker 2: question about that. She's got non farm payrolls three month
Speaker 2: moving average one sixteen. She does a revision which is
Speaker 2: hugely controversial and lowers that number, and that's the polarity
Speaker 2: between Wong and Piegs.
Speaker 5: Lindsey, let's marry these hard data with the softer ones.
Speaker 5: We had Dana Peterson on the show a little earlier
Speaker 5: in the week and talked about those consumer sentiment numbers
Speaker 5: that were softer than a lot of folks expected and
Speaker 5: I think spooked some folks in the market as well.
Speaker 5: How do you look at them in complement? And you
Speaker 5: were talking about what would happen if we saw a
Speaker 5: real sharp decline in employment, for instance, how the FED
Speaker 5: would react, how would both investors and consumers react to
Speaker 5: that as well? Because that has to be front of
Speaker 5: mine for FED policy makers too. Yes, they're kind of
Speaker 5: looking at this in a very in this vacuum of
Speaker 5: looking at it from a policy perspective, but they have
Speaker 5: to be aware or cognizant of how people are going
Speaker 5: to react to what they're doing as well.
Speaker 1: Absolutely, and we have to also be aware that not
Speaker 1: all the data is going to point in the same direction.
Speaker 1: This is not going to be an easy decision for
Speaker 1: the FED or an easy interpretation for the market by
Speaker 1: any means. But when we look at some of this
Speaker 1: secondary and tertiary data, what we're continuing to see is
Speaker 1: an ongoing resilient consumer. Now, as we saw this morning,
Speaker 1: somewhat softer income and consumption numbers, But looking at the
Speaker 1: Q two GDP report, we anticipated that we knew what
Speaker 1: the third month was going to be. But when we
Speaker 1: look at that, on average, we're still talking about a
Speaker 1: three percent growth rate and a three percent spending rate.
Speaker 1: That's still very indicative of a solid economy and an
Speaker 1: economy that can withstand a very slow and patient removal
Speaker 1: of policy firming. So I go back to the Fed's
Speaker 1: decision in September. The biggest risk of a fifty basis
Speaker 1: point move was always sending an inappropriate signal of concern
Speaker 1: regarding the state of the US economy the current level
Speaker 1: of weakness, as well as an inappropriate signal that the
Speaker 1: Fed is willing to rush back to a state of
Speaker 1: not just neutral, but accommodation to provide stimulus to an
Speaker 1: ailing economy, as opposed to simply removing their foot from
Speaker 1: the break and moving back towards neutral as the data
Speaker 1: begin to normalize.
Speaker 2: WELLNZI. Yet one final question here, and this is a
Speaker 2: men's respect and part of the pigs a charm, folks,
Speaker 2: is she's out in the Midwest, you know, I mean
Speaker 2: she's putting up with cubs, white sox and all that. Lindsey. Seriously,
Speaker 2: the FED has to aggregate towards one policy. Can they
Speaker 2: not do that? Because the American labor economy and the
Speaker 2: personal income around this polarized economy is so split. Can
Speaker 2: they not succeed in aggregating?
Speaker 1: Well, it is difficult. When we talk about the resilience
Speaker 1: of the consumer. It is dangerous to paint with a
Speaker 1: broad brush, because we do see that those at the
Speaker 1: middle and the lower end of the spectrum are having
Speaker 1: a much more difficult time faring in this environment amid
Speaker 1: higher borrowing costs, higher prices, the resumption of student debt
Speaker 1: payments than while those at the top are not necessarily
Speaker 1: feeling a pitch amid a growth of household net worth
Speaker 1: over sixteen trillion dollars in the past year. So we
Speaker 1: do see two very different themes in the underlying consumer.
Speaker 1: And it's not a difference of hals and have nots,
Speaker 1: but asset holders and non asset holders. So that is
Speaker 1: complicating FED policy, But that's nothing new. We always see
Speaker 1: that bifurcation. But what we do see, which is new.
Speaker 1: Is this growing divide among FED officials themselves. While the
Speaker 1: median is looking for fifty basis points by the end
Speaker 1: of the year, nine FEED officials say no, we're going
Speaker 1: to see maybe one twenty five basis points cut or
Speaker 1: no further adjustice is great. So that divide alone, I
Speaker 1: think underscores how difficult the December decision was and how
Speaker 1: difficult further decisions are going to be.
Speaker 2: David. If Pigsa was a governor, she'd dissent at every meeting.
Speaker 2: She'd be the Catherine Man of American economicory. She'd be
Speaker 2: like pounding the table. Jay, no, Chay, no, don't do it. Lindsey,
Speaker 2: pigs thank you so much. It's Stifel there pushing against
Speaker 2: the soft landing, joining us on for Chicago, where she's
Speaker 2: interviewing to be the general manager of Chicago White Sox.
Speaker 2: John Adams, Gina. Martin Adams joins us here on your
Speaker 2: stock market, your bullmarket forward, Gina, I'm going to cut
Speaker 2: to the chase. There's all this noise, China, China. Are
Speaker 2: we just discounting still double digit earnings growth?
Speaker 6: I think it's a great point is the macro has oftentimes,
Speaker 6: oftentimes overwhelmed the earnings in terms of commentary, but ultimately
Speaker 6: earnings drive stock prices, and earnings have frankly continued to
Speaker 6: surprise the consensus. Right now, the analyst consensus is looking
Speaker 6: at close to ten percent earnings growth emerging over the
Speaker 6: course of the next year. I would say the stock
Speaker 6: market is pricing closer to five to seven percent earnings
Speaker 6: growth just based upon what our macro models suggest. What's
Speaker 6: been so interesting about the last two years, and I
Speaker 6: think this persists is the macro has been closer to
Speaker 6: what the market price is, where the analyst consensus, even
Speaker 6: though they've been conservative, are still not bullish enough, and
Speaker 6: so that big divergence is what has created the uptrend
Speaker 6: in stocks. Is we persistently have this sort of negative undertone,
Speaker 6: this negative view that is embedded in the psychology, that's
Speaker 6: embedded in prices. But kind of the reality on the
Speaker 6: ground from corporations is that things are still improving and
Speaker 6: have been improving really since twenty twenty two, and that
Speaker 6: doesn't appear to be changing. Analysts are slowly getting on
Speaker 6: board with that, so certainly they're you know, expecting better
Speaker 6: growth in the next twelve months than they did twelve
Speaker 6: months ago. But it is a slow climb.
Speaker 2: Textbook Gino Martin Adams, and she combines us like Edheimen,
Speaker 2: with fundamental analysis, technical analysis, and a respect for the
Speaker 2: economic Gino Martin Adams. What does the bull market chart
Speaker 2: tell you?
Speaker 1: Oh?
Speaker 6: Well, I mean, look, the trend is your friend. The
Speaker 6: stocks are still up and to the right right, so
Speaker 6: very simplistically, when you're making new highs, and more than
Speaker 6: seventy percent of stocks they're still trading above their tu
Speaker 6: nity moving average. So contrary to popular beliefs, breadth is
Speaker 6: still improving. We're making new highs. Even small caps are
Speaker 6: showing some signs of clawing their way out of their
Speaker 6: bear market condition that has existed for the better part
Speaker 6: of three years. There's just not a lot in the
Speaker 6: charts to complain about. If there is anything to complain about,
Speaker 6: it is really about leadership inside the market, where we
Speaker 6: do appear to be sort of grappling with a potential
Speaker 6: leadership change away from the MAX seven toward the four
Speaker 6: ninety three other stocks in the S and P five hundred,
Speaker 6: sort of away from predominantly growth towards some mored value
Speaker 6: oriented industries. There are a lot of sort of internal churn.
Speaker 6: A lot of internal churning happening, but nonetheless, markets are
Speaker 6: still making new heights, especially the S and P five hundred,
Speaker 6: so there's not a lot to complain about from a
Speaker 6: technical perspective. The only thing that I would say from
Speaker 6: a broad charting perspective that we're watching with a really
Speaker 6: close sort of eye is what's happening with momentum. When
Speaker 6: we look at what's happening with momentum in the S
Speaker 6: and P five hundred, it's been struggling as a result
Speaker 6: of this internal turn. It certainly has confirmed the recent
Speaker 6: rally off of those October sort of depressed lows, but
Speaker 6: nonetheless it's not as positive or not as strong as
Speaker 6: we would like it to see or like to see it,
Speaker 6: and I think that that's something to watch going forward.
Speaker 6: We do need to gather a bit more momentum to
Speaker 6: sustain the games that we've had.
Speaker 5: Gina, great to talk to you, and I wanted to
Speaker 5: ask you about this China story that we've been falling
Speaker 5: over the course of the week and what it means
Speaker 5: for US investors. We talked a little earlier in the
Speaker 5: show about the PBOC put on Chinese equities. What does
Speaker 5: it mean for the palatability or attractiveness of Chinese stocks
Speaker 5: what the bank has done this week.
Speaker 6: Yeah, I think it's been tough in China. Honestly, we've had,
Speaker 6: you know, a series of stimulus measures all year, from
Speaker 6: direct purchases of assets in the market, to changes in
Speaker 6: policy rates to the news of this week, you know,
Speaker 6: to the degree that it ultimately creates more stability in
Speaker 6: economic conditions, that's the thing that I think can draw
Speaker 6: investors back into China. It's a wait and see approach
Speaker 6: though with respect to China, and it's been such a
Speaker 6: difficult run for the last several years as a global
Speaker 6: investor starting to think about investment in China that we've
Speaker 6: had a proliferation of EM equity products excluding China, just
Speaker 6: to try to get at where the other growth opportunities
Speaker 6: are in EM. So, you know, I would say, we
Speaker 6: need to see this manifest itself in real economic conditions
Speaker 6: and even more importantly, real earnings growth prospects improving for China.
Speaker 6: That's a long time coming yet, because when you look
Speaker 6: at EM equity revisions X China, they are surging. Equity
Speaker 6: analysts are getting much more optimistic about the outlook for
Speaker 6: earnings growth outside of China, and analysts are not telling
Speaker 6: us that things are getting better in China yet, So
Speaker 6: we need to see that momentum turn around there.
Speaker 2: You know, I got to ask you this, Gina. I
Speaker 2: know you're not on speaking terms with Allison Williams, but
Speaker 2: the banks for end of Q three, what is their
Speaker 2: business plan for Q four? How bad are the cost
Speaker 2: cuts going to be? Yeah?
Speaker 6: I think, first of all, I'm in great terms with
Speaker 6: Alison Williams, and I think she was a brilliant analysts
Speaker 6: in terms of all those H courses help Gina in
Speaker 6: terms of financials. You know, I think that it's going
Speaker 6: to be really interesting coming into this court because the
Speaker 6: banks spent so much of their time really cutting costs
Speaker 6: back in twenty twenty three that that's been a bit
Speaker 6: of a tailwind.
Speaker 1: Right.
Speaker 6: Remember twenty twenty three was the year in which we
Speaker 6: saw tremendous provisions, a lot of concern about loan losses
Speaker 6: emerging in commercial real estate, decent amount of cost cutting
Speaker 6: coming out of that sector because the yield curve was
Speaker 6: tremendously inverted. Right, We've come off of that deep inversion
Speaker 6: in the yield curve over the course of the last
Speaker 6: several months. That improves the outlook for an interest margin
Speaker 6: for some of the segments, but it's still tough going.
Speaker 6: What was most interesting out of the second quarter is
Speaker 6: that financials, for the first time in a long time,
Speaker 6: feed on top line. We saw better revenue growth out
Speaker 6: of financials than we've seen in a very, very long time.
Speaker 6: That's what I'm looking for going into third quarter because
Speaker 6: that's what's been missing in financials for the better part
Speaker 6: of five years. Not just sort of short term what's
Speaker 6: happening with a lot of cost cuts. When we get
Speaker 6: into October and then even more importantly in the January season, though,
Speaker 6: I think you do want to start looking for layoffs.
Speaker 6: Are we going to see a surgeon layoffs again? This
Speaker 6: sector has been a big persistent part of that story
Speaker 6: from twenty twenty two on financials as well as technology companies.
Speaker 6: Communication companies, to a slightly lesser degree, have led the
Speaker 6: layoff trend. They've kept costs very, very lean, and that's
Speaker 6: enabling margins to continue to stay a float. There. So
Speaker 6: there are a lot of moving parks to watch for
Speaker 6: in financials. It's frankly one of the sectors that we've
Speaker 6: been watching most closely in this rotation because we are
Speaker 6: seeing much better growth start to emerge there and finally
Speaker 6: some investor interest, but I think that that's mostly related
Speaker 6: to the yieldcaper.
Speaker 2: Okay, Gina, don't take the White Sox job unless you
Speaker 2: can clean out the bullpen. Gina Martin Adams from Chicago,
Speaker 2: where she's on a job interview at Kimiski Park, which
Speaker 2: I will always call it.
Speaker 5: In a fact check this entime.
Speaker 2: Grandpa took me to Komiski Park. I saw Nellie Fox
Speaker 2: a few years ago. Only Michael Barr on the planet
Speaker 2: knows who Nellie Fox is. This is a Bloomberg Surveillance podcast,
Speaker 2: bringing you the best in economics, finance, investment, and international relations.
Speaker 2: You can also watch the show live on YouTube. Visit
Speaker 2: the Bloomberg Podcast channel on YouTube to see the show
Speaker 2: weekday mornings from seven to ten am Eastern from our
Speaker 2: global headquarters in New York City. Subscribe to the podcast
Speaker 2: on Apple, Spotify, or anywhere else you listen, and always
Speaker 2: on Bloomberg Radio, the Bloomberg Terminal, and the Bloomberg Business App.