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Speaker 1: Bloomberg Audio Studios.

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Speaker 2: Podcasts.

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Speaker 1: Radio.

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Speaker 3: News.

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Speaker 1: This is the Bloomberg Surveillance Podcast. Catch us live weekdays

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Speaker 1: at 7 a.m. Eastern on Apple CarPlay or Android Auto

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Speaker 1: with the Bloomberg Business app. Listen on demand wherever you

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Speaker 1: get your podcasts or watch us live on YouTube.

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Speaker 4: Phil Newhart is Director of Market Economic Research at First

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Speaker 4: Citizens Bank and has been wonderfully patient in our world

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Speaker 4: headquarters this morning with the Texas Press Conference, etc. Phil,

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Speaker 4: thank you so much. for joining us. Jay, is this

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Speaker 4: inflation a buoyancy for revenues and then the stock market,

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Speaker 4: or is this not good for equities?

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Speaker 5: Well, it certainly has been a buoyancy. I mean, look

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Speaker 5: at nominal GDP running 6% to 7%. That is pacing

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Speaker 5: revenues higher in the S & P. The concern I

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Speaker 5: have is that we have two consumers. We have a

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Speaker 5: K-shaped recovery. And when you look at the lower quartiles

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Speaker 5: of the consumer, that inflation is crushing them look at

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Speaker 5: the survey consumer finances from the fed the bottom two

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Speaker 5: quartiles half of u.s consumers have seen negative net worth

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Speaker 5: gains from 2022 to 2025. Their net worth has declined

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Speaker 5: over those three years.

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Speaker 4: What happened?

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Speaker 6: We had inflation, right?

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Speaker 5: If you aren't exposed to stocks, you aren't exposed to

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Speaker 5: the housing market, that is really taking a chunk out.

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Speaker 5: I think that's playing out in the political sphere, maybe

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Speaker 5: not in the earnings sphere where we have earnings growing

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Speaker 5: north of 30 percent in.

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Speaker 4: The S & P 500. This is just in, Damian.

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Speaker 4: This is from Robert, who– is working with a hedge fund,

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Speaker 4: and I can't use his name. It's sort of like

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Speaker 4: the disclosure thing. He models out core CPI of 2.8%

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Speaker 4: up from the recent low of 2.4%. That's some interpolation.

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Speaker 4: When you go to Hamilton College, you learn both interpolation

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Speaker 4: and and extrapolation.

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Speaker 2: Well, I don't want to take anything away from what

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Speaker 2: Phil was just saying here about the importance of the PA,

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Speaker 2: so to speak, the personal account, the wealth that has

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Speaker 2: been accumulated across U.S. households for the better part of post-COVID,

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Speaker 2: let's just say. It's really not been across all sectors.

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Speaker 2: It's really just been concentrated in those with the very wealthy.

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Speaker 2: And this is now being felt on the street where

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Speaker 2: the consumer needs it most. And we expect more of this.

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Speaker 2: Is that right, Phil?

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Speaker 5: Yeah, I think this is a trend that's in place

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Speaker 5: really probably until the cycle ends. Does it matter for

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Speaker 5: the fundamentals.

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Speaker 4: Of the market?

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Speaker 5: I'm not so sure. Earnings grew over 30 percent the

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Speaker 5: most recent earnings season. That's the third straight month of

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Speaker 5: north of 25 percent earnings growth. All 11 sectors saw

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Speaker 5: earnings growth as well. Earnings and the sort of lower

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Speaker 5: quartile consumer are two different things. And earnings are clearly

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Speaker 5: driving this stock market higher.

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Speaker 2: Well, what are your thoughts on this cross-ownership? We talk

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Speaker 2: about Anthropica, well, the MAG-7 own it. I mean, just

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Speaker 2: how much of these earnings forecasts, how much of the

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Speaker 2: sum-of-the-parts analysis is really a lot of their holdings or

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Speaker 2: their writing up of valuations that might just not be

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Speaker 2: worth what they once were?

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Speaker 5: I think it's part of the story in terms of

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Speaker 5: those hyperscalers. It's why the market is starting to pay

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Speaker 5: attention to free cash flow yield. When you see a

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Speaker 5: hyperscaler report, the earnings number matters, but the free cash

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Speaker 5: flow yield probably matters more.

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Speaker 4: Then at first, Citizens Bank, what are you hearing from

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Speaker 4: your clients? I mean, I'm seeing adult portfolios lightening up

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Speaker 4: on big tech is a basic statement.

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Speaker 7: Right.

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Speaker 4: Is that what you're experiencing among your customers and clients?

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Speaker 5: If you look at our internal equity strategies, they're factor-based.

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Speaker 5: We're up in profitability. We do own tech, but we

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Speaker 5: own defensive sectors as well. Staples, utilities. So a little

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Speaker 5: bit of a barbell approach.

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Speaker 4: This is my question of the day. What kind of

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Speaker 4: tech do you own?

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Speaker 6: We own it all.

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Speaker 5: I think that what you've seen in semis in recent

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Speaker 5: days just shows that if you're ultra concentrated in one industry,

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Speaker 5: that you can really take it on the chin. It

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Speaker 5: was interesting to see certain hyperscalers and the real noise

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Speaker 5: of the two days last week actually rallied as semiconductors

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Speaker 5: sold off. So we think you need diversification across the

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Speaker 5: tech sector.

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Speaker 4: I'm going to make this up as I can. A

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Speaker 4: giant of the bond market just walked in the studio.

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Speaker 4: I have no idea he was with us today.

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Speaker 3: A.J.

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Speaker 4: Rajadak is global chairman of research at Barclays. Can we

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Speaker 4: talk to both of you at the same time? Because

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Speaker 4: we have two different worlds here. I've got A.J. Rajadak,

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Speaker 4: definitive on fixed income. And again, Phil Newhart of First

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Speaker 4: Citizens Bank, really looking at the blended outcome of it.

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Speaker 4: I've got Waller for the first time saying 50 beeps.

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Speaker 4: Your economics department is aged today at Barclays. It's so

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Speaker 4: screwed up. But I got an inflationary tendency. Do you

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Speaker 4: just model price down, yield up? Or is there something

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Speaker 4: unique you see at Barclays that stuns the market?

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Speaker 3: For December? For the December meeting?

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Speaker 4: Get me out to 2027 as you can.

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Speaker 3: Okay, so Tom, I'm lucky if I get the next

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Speaker 3: two months right.

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Speaker 4: Let's start with that.

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Speaker 3: But no, I think the Fed will not rock the boat.

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Speaker 3: They should. I mean, I've known Chris for a while,

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Speaker 3: Governor Waller. And I mean this with the utmost respect.

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Speaker 3: He has been a bit all over the place, if

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Speaker 3: you remember. You know, he was dovish at one point,

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Speaker 3: not so far ago. Then he suddenly changed. He seems

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Speaker 3: to be driven exactly by what is going on in

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Speaker 3: three months core CPI, regardless of everything else, you know.

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Speaker 4: So.

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Speaker 3: I don't think the FOMC is going to pay heat

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Speaker 3: to him saying we can go 50.

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Speaker 4: Okay, but the heart of the matter to everyone listening,

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Speaker 4: both Global Wall Street, the clients of Phil Newhart, and

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Speaker 4: even Damien Sassauer, is this phrase of Thatcher, expect the unexpected.

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Speaker 4: Are you and Barclay's research quoted worldwide on this, and

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Speaker 4: particularly the hyperscaler debt issuance, are you expecting the unexpected,

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Speaker 4: or are we living with a predictable, guessable milieu right now?

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Speaker 3: I think for monetary policy, we are living with something predictable.

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Speaker 3: There are entire client conversations, 45-minute long meetings, where I

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Speaker 3: don't mention the words Kevin Walsh once. And the reason

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Speaker 3: is because what happens with the AI CapEx cycle, which

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Speaker 3: is where the unexpected comes in, matters enormously more than

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Speaker 3: traditional macro. So it depends on what you ask.

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Speaker 2: Well, Phil, let me pivot to you here because I

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Speaker 2: go back to that SoftBank $ 11. 1 billion high-yield bond raise

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Speaker 2: just a few months back. And now I'm seeing this

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Speaker 2: wasn't them writing down data centers like actual collateral. They

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Speaker 2: were writing down $ 3. 7 billion in non-refundable advanced payments. for

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Speaker 2: data set. I mean, that's almost like they just burnt money, right?

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Speaker 2: I mean, talk to us about what this means for

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Speaker 2: the AI trade.

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Speaker 4: Yes.

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Speaker 5: If we look at fixed income, first, the point of

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Speaker 5: higher yields, we see an opportunity in terms of balanced portfolios.

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Speaker 5: We are reminding clients that fixed income is a viable

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Speaker 5: asset class. You have an aggregate bond yielding this morning

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Speaker 5: at 5.2%. So there's opportunity. Sector-specific, when you look at

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Speaker 5: our fixed income strategies, We've really avoided the hyperscalers. We're

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Speaker 5: just not comfortable there. We are emphasizing sectors like energy

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Speaker 5: and financial. So we're fully invested, investment-grade credit. We do

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Speaker 5: not play in high yield. But we've been pretty cautious

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Speaker 5: around the hyperscalers, to your point, Damian.

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Speaker 2: Well, look, I mean, do you see, I mean, look,

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Speaker 2: I mean, Ajay, let me shift to you here. We've

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Speaker 2: just seen an emerging market sovereigns, right? We've seen a

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Speaker 2: lot of high yield issuance hit the market, Pakistan, Egypt, Turkey, Colombia.

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Speaker 2: You know, do you see the risk rising of crowding

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Speaker 2: out into other areas of the U.S. dollar pay fixed

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Speaker 2: income market?

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Speaker 6: Yeah, there's no question. So just to put some numbers

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Speaker 6: out there, Damian.

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Speaker 3: In 10-year equivalence in duration, the US private sector will

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Speaker 3: have to absorb about $ 1. 6 to $ 1. 7 trillion in treasuries

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Speaker 3: and IG, including the hyperscalers this year. Next year, that

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Speaker 3: number goes up to about $ 1. 9 trillion. The problem is

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Speaker 3: the amount of treasury duration that the market has to

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Speaker 3: absorb goes down because the buybacks kick in full scale

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Speaker 3: next year. So the amount of hyperscaler issuance is exploding.

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Speaker 3: It's going up by a factor of at least one

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Speaker 3: and a half next year.

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Speaker 4: We say good morning to all of you across America,

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Speaker 4: particularly to Global Wall Street. We've got some great conversations

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Speaker 4: coming up. Phil North, thank you so much for joining

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Speaker 4: us for First Citizens today. A busy, busy morning, the

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Speaker 4: Texas Press Conference, and then futures coming down a little bit.

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Speaker 4: NASDAQ off 1.1% right now. In the yield market, AJ

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Speaker 4: Rajadaksh has aged here with a higher 12 basis point

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Speaker 4: two-year yield as well. I want you to discuss... away

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Speaker 4: from your full faith and credit analysis, what it means

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Speaker 4: for the off-balance sheet hyperscaler shenanigans. I've got Barclays. I've

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Speaker 4: got Amanda over at Goldman Sachs, Morganson, and others. You

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Speaker 4: guys are thinking as hard as you can about this.

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Speaker 4: What is the risk of to our viewers and listeners

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Speaker 4: of this off-balance sheet, this is my own word, Damien, shenanigans.

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Speaker 4: What's the risk?

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Speaker 3: The risk is, and I don't think, Tom, this is

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Speaker 3: a risk for 2027, but the risk eventually is of

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Speaker 3: massive overbuilding. on the compute side, because each individual hyperscaler

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Speaker 3: thinks they're making rational decisions, but because so much of

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Speaker 3: it starts to go off balance sheet, they're not aware

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Speaker 3: of what the others are doing. And eventually, I don't

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Speaker 3: think this is 27, but you end up with, you know,

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Speaker 3: an oversupply of compute, you know, that overwhelms demand. And

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Speaker 3: then problems start. I mean, big problems. Again, Satya is

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Speaker 3: out there. You've seen that, right? Satya is out there

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Speaker 3: talking to everyone, saying, we're not going to repeat 1873

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Speaker 3: because we are watching the history of that.

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Speaker 4: These off balance sheet things make me. So blend your

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Speaker 4: fixed income world into a quant world. What are the

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Speaker 4: dynamics you see right now? Almost the quantitative drift day

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Speaker 4: to day of all this fancy paper. Is there something

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Speaker 4: unique that you see in the Greek letters here that

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Speaker 4: signal what could come?

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Speaker 3: I think what we see most is that despite all

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Speaker 3: the noise and hand-wringing about the extent of fiscal profiles

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Speaker 3: worsening across the West, the vast majority of the reason

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Speaker 3: why bond yields are higher this year is simply because

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Speaker 3: the economy was stronger than expected. Boom economy.

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Speaker 4: Boom economy.

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Speaker 3: And the inflation was stickier than expected. But term premia

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Speaker 3: associated with you and I worrying about U.S. fiscal solvability

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Speaker 3: is not remotely reflected in the 10-year right now.

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Speaker 8: Stay with us. More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

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Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on

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Speaker 4: Right now, we're going to get back to where your

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Speaker 4: inflation is. We start strong with Tiffany Wilding. Obviously, economists

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Speaker 4: at PIMCO driving all of their perspective. If I just

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Speaker 4: go on to Google or whatever, Tiffany, and I look

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Speaker 4: at this joke that we're modeling a 2% target for

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Speaker 4: whatever inflation is, you know, depending on how I look

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Speaker 4: at it, I'm back five and a half years. When

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Speaker 4: do we throw in the towel and get away from

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Speaker 4: a 2%, 2.0% ridiculousness?

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Speaker 7: Yeah, well, clearly the Fed has missed their inflation target for,

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Speaker 7: I think, a more prolonged period than they're clearly comfortable

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Speaker 7: with right now. You know, and ultimately, I think that's

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Speaker 7: why you're seeing Chris Waller come out before the CPI report,

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Speaker 7: you know, basically warning that if it's strong, that, you know,

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Speaker 7: 50 basis point hike in December is on the table

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Speaker 7: for discussion. You know, and when we look at the

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Speaker 7: underlying details of this report, It does look like we

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Speaker 7: are seeing a broadening out of inflation. Now, we think

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Speaker 7: that it's related to passing through of higher energy costs, diesel,

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Speaker 7: shipping costs, and things like that. If you look across

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Speaker 7: core goods prices, they were just unanimously strong. But also

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Speaker 7: on the services side, public transportation outside of airfares, you're

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Speaker 7: seeing broadening out of increases there to offset higher energy

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Speaker 7: costs there. But then more generally, services, ex-shelter, recreation services

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Speaker 7: and things like that, they're also accelerating. So, you know,

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Speaker 7: this is one of those prints that, you know, is

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Speaker 7: incredibly disappointing for a central bank that wants to make

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Speaker 7: sure that, you know, what should be price level adjustments

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Speaker 7: are not broadening out into more inflationary pressures.

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Speaker 4: Damien Sessar, what Tiffany Wilding just described is how I

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Speaker 4: feel at home.

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Speaker 8: That's symbolic.

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Speaker 2: Well, look, I mean, Tiffany, you know, look, you rightly

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Speaker 2: did point out Chris Waller's comments earlier this morning, but

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Speaker 2: this is just the tip of the iceberg this week. Now,

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Speaker 2: I mean, we see a lot of Fed speak coming through.

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Speaker 2: Can any Fed governor outgov what Waller just said this morning?

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Speaker 7: Well, I think what we're looking for now is that

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Speaker 7: you have some consistency across the language of other Federal

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Speaker 7: Reserve officials. So it does seem like as you've had

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Speaker 7: Chair Warsh that has stepped back from any kind of guidance,

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Speaker 7: whether it be framework or forward or what have you,

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Speaker 7: that Christopher Waller has sort of stepped in and provided

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Speaker 7: a bit of a guiding light on what the central

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Speaker 7: bank may do. And it does seem like after he speaks,

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Speaker 7: there is more of a thematic effort from others to

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Speaker 7: sort of echo and emphasize, you know, what he has said.

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Speaker 7: So I think what we're going to be looking for

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Speaker 7: is other central bank officials and how they're viewing this report.

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Speaker 7: You know, clearly 50 basis points is on the table.

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Speaker 7: You know, now what I would say here as well is,

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Speaker 7: you know, when we look across the inflation data and

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Speaker 7: the broader economy, we don't think the Federal Reserve is

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Speaker 7: sort of behind the curve like what it looked like

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Speaker 7: in 2022. Now, of course, you know, that early on,

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Speaker 7: you know, did appear to have more transitory factors, you know,

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Speaker 7: clearly than inflation broadened out. You know, but if we

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Speaker 7: look now at, you know, the Fed's own Taylor rules,

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Speaker 7: for example, you know, they're not that far away from

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Speaker 7: what monetary policy rules would suggest they should be. You know,

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Speaker 7: whereas in, you know, in 2022, you know, those simple

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Speaker 7: Taylor rules were suggesting that the Fed was, you know,

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Speaker 7: much lower than they should have been.

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Speaker 9: So we still think.

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Speaker 7: This looks like an adjustment. But nevertheless, it's concerning that

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Speaker 7: inflation does look like it's broadening out a bit here.

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Speaker 4: I want to get back to first principles, folks. Codified

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Speaker 4: by Greenspan, they used to do eighth of a point.

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Speaker 4: Codified by Greenspan was a quarter of a point. 0.25

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Speaker 4: or 25 basis points and all of a sudden today

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Speaker 4: we're talking tiffany wilding even said the 50 basis point

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Speaker 4: phrase therefore i mean damien it's just too.

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Speaker 2: Much well tiffany i'd really love to get your opinion

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Speaker 2: on the true state of the u.s consumer here and

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Speaker 2: more to the point you know what is your belief

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Speaker 2: like what is the impact of equity market valuations and

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Speaker 2: of course housing affordability on the u.s consumer do you

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Speaker 2: see it sentiment deteriorating at all here.

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Speaker 7: Yeah, I mean, I think higher prices are certainly weighing

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Speaker 7: on the consumer, at least certain consumers. We've been talking

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Speaker 7: about the so-called K-shaped economy for quite some time, where

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Speaker 7: you have higher income that's doing quite well because they

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Speaker 7: are enjoying the equity market gains that they've received over

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Speaker 7: the last number of years, several years. And I think

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Speaker 7: that's still the case. But I think what we're seeing

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Speaker 7: is just that demand in the U.S. economy is you know,

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Speaker 7: is incredibly strong. And that is, you know, despite the

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Speaker 7: various shocks and headwinds that we've seen this year, the

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Speaker 7: energy shock, you know, tariffs and otherwise, we've seen consumption

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Speaker 7: and also, obviously, investment, which is related to the AI

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Speaker 7: build-out that's been incredibly strong. Now, we think some of

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Speaker 7: it cools from the kind of breakneck pace that we

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Speaker 7: saw in the third quarter. And you get some of

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Speaker 7: cooling that is happening in the fourth quarter, the first

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Speaker 7: quarter of next year. But nevertheless, I think what the

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Speaker 7: Federal Reserve is concerned about is that you have an

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Speaker 7: economy that looks incredibly strong from a demand perspective, final

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Speaker 7: domestic demand, and you have inflation that looks stickier than

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Speaker 7: they would like here. And so they, you know, they

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Speaker 7: want to make sure that they keep financial conditions, you know,

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Speaker 7: broadly tight and from, you know, easing anything here to

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Speaker 7: reduce the risk that, you know, these inflationary pressures broaden out.

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Speaker 4: Tiffany, 50 basis point welding. Thank you for joining us

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Speaker 4: this morning. She's with Pacific Investment Management Company, PIMCO. Stay

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Speaker 4: with us.

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Speaker 8: More from Bloomberg Surveillance coming up after this.

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Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

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Speaker 1: weekday afternoons from 7 to 10 a.m.

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Speaker 7: Eastern.

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Speaker 1: Listen on Apple CarPlay and Android Auto with the Bloomberg

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Speaker 1: Business app or watch us live on YouTube.

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Speaker 4: Cameron Dawson gets us started strong at a new edge

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Speaker 4: wealth and she knows I'm going to rip up the script.

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Speaker 4: I mean, you know, I got to go there. My

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Speaker 4: essay of the year is Rob Arnott and Cam Harvey

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Speaker 4: and Company. Talking about below revenue is gross profit. That's

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Speaker 4: what they look at. All the other noise is there.

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Speaker 4: I've got a technology industry we're addicted to where Microsoft

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Speaker 4: has a gross profit of some ginormous number here. I'm

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Speaker 4: bringing it up right now. Gross profit, 66 cents on

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Speaker 4: the dollar.

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Speaker 7: Yep.

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Speaker 4: Generous Mills, just out where they reorg, is half that,

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Speaker 4: 33 cents on the dollar. Why should we invest in

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Speaker 4: a less profitable everything else out there in the market?

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Speaker 10: Well, you know what has a gross profit that's even

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Speaker 10: higher than that? It's Micron at 86 cents on the dollar.

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Speaker 10: And that's an incredibly impressive stat because we've been in

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Speaker 10: this world where demand for semiconductors has been absolutely powerful.

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Speaker 10: That has led to huge gross margin expansion for a

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Speaker 10: name like that. But we know that those gross margins

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Speaker 10: are not sustainable, at least on historical standards. But what's

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Speaker 10: fascinating is the market expects them to keep on continuing higher,

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Speaker 10: expanding further, staying at these very, very heady levels. But

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Speaker 10: history would show that once you start seeing gross margins

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Speaker 10: start to roll over for a cyclical company like a Micron,

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Speaker 10: they typically don't fall a little. They fall a lot.

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Speaker 8: Oh, it's my turn, huh? Oh, great.

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Speaker 6: Thank you.

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Speaker 4: First time anchor.

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Speaker 2: Cam, the Anthropic IPO, right? I mean, about a month ago,

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Speaker 2: we were looking at a $ 2 trillion market cap. Now

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Speaker 2: we're looking at $ 1. 1 trillion. We know that Amazon, Alphabet,

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Speaker 2: a lot of these Mag7 companies own large stakes of Anthropic.

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Speaker 2: My question for you is, I mean, we saw Amazon

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Speaker 2: back in June, you know, 200 billion, you know, stake

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Speaker 2: in the company. How much of that has been smoothing

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Speaker 2: out their earnings in recent quarters? And as you do

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Speaker 2: the sum of the parts, as walk the motor in,

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Speaker 2: you know, valuation of these companies on a forward basis,

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Speaker 2: how much of that factors into your analysis?

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Speaker 10: Remember in the first half of this year, we saw

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Speaker 10: massive contribution from below the line gains unfavorably. non-marketable securities,

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Speaker 10: which is just a way to say that Anthropic and

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Speaker 10: SpaceX gains were massive drivers of earnings upside in 1Q

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Speaker 10: and 2Q of 2026. And the reason why those gains

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Speaker 10: happened is because the companies were raising capital in those quarters.

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Speaker 10: If you look at the last time that Anthropic raised capital,

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Speaker 10: it was at about a $ 985 billion valuation. So when

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Speaker 10: Anthropic goes public, let's say it comes out at $ 1. 1 trillion,

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Speaker 10: that will be an uplift to somebody like Google in

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Speaker 10: their overall earnings. But the challenge you have is that

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Speaker 10: that's not nearly as much as what we saw in

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Speaker 10: the prior funding raises and the increases in the valuation

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Speaker 10: that we saw. I would look very closely at 1Q

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Speaker 10: and 2Q 2027 estimates. Important to note that the street

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Speaker 10: currently has headline earnings growing above the 2026 estimates, which

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Speaker 10: means that the operating earnings are expected to make up

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Speaker 10: for those gains and then some, even when they don't repeat.

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Speaker 2: Cam, there's clearly a positioning dynamic in play. You've mentioned

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Speaker 2: it in your notes. You know, I look at the

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Speaker 2: low vol factor, the style factor in equities. I mean,

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Speaker 2: we've seen an 18, 19 full percentage point round trip.

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Speaker 2: I think it was down 9% only a few months back.

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Speaker 2: Now we're up 9% on the year. So sentiment is shifting.

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Speaker 2: Talk to us a little bit about the industry that

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Speaker 2: you're watching most here as a sort of gauge of

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Speaker 2: litmus paper, so to speak, Tom, of investor sentiment.

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Speaker 6: Is it the banks?

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Speaker 10: Yeah, we've been thinking that you need to watch the

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Speaker 10: banks very, very closely because the banks will effectively tell

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Speaker 10: you whether or not they see this issue happening with

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Speaker 10: some of the questions around AI funding and the sustainability

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Speaker 10: of that trade, whether or not it becomes a bigger

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Speaker 10: economic issue. If the banks hold in, mostly the regional banks,

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Speaker 10: some of the large-cap banks are skewed by investment banking,

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Speaker 10: year-over-year comps being very tough. But watch the regional banks.

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Speaker 10: If those remain in uptrends, if those continue to hold support,

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Speaker 10: it's effectively the market saying, look, we're not so worried

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Speaker 10: that this becomes a broader growth scare.

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Speaker 4: It's more contained. Right. I want to go two ways here.

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Speaker 4: One is off the banks there. And to me, the

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Speaker 4: whole thing hedges on the banks doing well given a

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Speaker 4: sustained nominal GDP. I think it's been a dearth of

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Speaker 4: quiet since the election. Are you modeling out at New

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Speaker 4: Edge a continued buoyant nominal GDP that keeps the gravy

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Speaker 4: train going?

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Speaker 10: Well, remember, we have two components of nominal GDP, real GDP,

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Speaker 10: which we don't see signs is going to slow materially.

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Speaker 10: But then you have the inflation part of nominal GDP.

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Speaker 10: And that's where we continue to expect inflation to run

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Speaker 10: hot in the near term. But start to ebb off

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Speaker 10: when we get into 2027 simply because of your comparisons

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Speaker 10: with energy prices.

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Speaker 4: Yeah, OK, I get that. Energy prices. Brent crude, $ 90

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Speaker 4: a barrel. West Texas Intermediate.

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Speaker 7: $ 85 a barrel.

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Speaker 4: Are you modeling out? a nominal GDP that just ebbs

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Speaker 4: back so the gain keeps going? Or is it something

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Speaker 4: more dramatic?

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Speaker 10: Yeah, look, we don't see a big fall-off in underlying

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Speaker 10: real GDP demand. If that was the case, if we

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Speaker 10: were thinking that we needed to cut forecasts for 26

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Speaker 10: or 2027 real GDP, then it certainly would augur a

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Speaker 10: more risk-off kind of environment. But we continue to come

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Speaker 10: back to the fascinating point that household consumption forecasts are

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Speaker 10: now higher today than they were prior to the war starting,

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Speaker 10: which just means that forecasters are not seeing overall the

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Speaker 10: energy shock causing households to pull back in a meaningful

433
00:23:18,780 --> 00:23:21,880
Speaker 10: way because there's been offsets and other things like OBBB

434
00:23:21,920 --> 00:23:22,580
Speaker 10: and the wealth effect.

435
00:23:23,000 --> 00:23:23,680
Speaker 4: Cam, the U.S.

436
00:23:23,700 --> 00:23:26,770
Speaker 2: Treasury 10-year yield's off, what, something like 43 basis points

437
00:23:26,830 --> 00:23:29,650
Speaker 2: off its October 5th peak now. It's come down quite considerably.

438
00:23:29,690 --> 00:23:32,440
Speaker 2: Back then, BlackRock was saying, you can easily build a

439
00:23:32,480 --> 00:23:36,420
Speaker 2: diversified fixed income portfolio with an A- rating, a 7% yield,

440
00:23:36,480 --> 00:23:37,720
Speaker 2: and a duration of three years.

441
00:23:38,359 --> 00:23:39,010
Speaker 4: Has that changed?

442
00:23:39,790 --> 00:23:43,250
Speaker 10: Well, you're not getting nearly as much yield as you

443
00:23:43,270 --> 00:23:46,350
Speaker 10: did at those peak sell-off points. I would note that

444
00:23:46,390 --> 00:23:51,679
Speaker 10: we're finding support at the 100-day moving average for both 10s, 2s,

445
00:23:51,970 --> 00:23:55,260
Speaker 10: and 30s. We have some hawkish comments coming out of

446
00:23:55,340 --> 00:23:58,359
Speaker 10: Waller this morning, which is giving a little buoyancy to

447
00:23:58,400 --> 00:24:01,409
Speaker 10: those two-year yields. So could we find ourselves in an

448
00:24:01,470 --> 00:24:04,450
Speaker 10: environment where yields start to march back up? The thing

449
00:24:04,490 --> 00:24:08,210
Speaker 10: I'd be watching closely is economic surprises. Typically, we see

450
00:24:08,260 --> 00:24:11,820
Speaker 10: a strong relationship between the 10-year and economic surprises that's

451
00:24:11,880 --> 00:24:14,340
Speaker 10: broken down in the last month because the 10-year has

452
00:24:14,460 --> 00:24:16,360
Speaker 10: rallied on equity market weakness.

453
00:24:16,740 --> 00:24:17,980
Speaker 4: But the reality is.

454
00:24:18,280 --> 00:24:21,160
Speaker 10: If economic surprises continue to push higher, that puts upward

455
00:24:21,220 --> 00:24:22,810
Speaker 10: pressure on 10-year yields.

456
00:24:22,869 --> 00:24:24,930
Speaker 4: Kim Dawson, thank you so much for New Edge Wealth

457
00:24:24,950 --> 00:24:27,270
Speaker 4: this morning there on the banking sector.

458
00:24:29,560 --> 00:24:33,740
Speaker 8: Stay with us. More from Bloomberg Surveillance coming up after this.

459
00:24:40,980 --> 00:24:44,560
Speaker 1: You're listening to the Bloomberg Surveillance Podcast. Catch us live

460
00:24:44,640 --> 00:24:47,830
Speaker 1: weekday afternoons from 7 to 10 a.m. Eastern. Listen on

461
00:24:47,940 --> 00:24:51,200
Speaker 1: Apple CarPlay and Android Auto with the Bloomberg Business app

462
00:24:51,410 --> 00:24:53,110
Speaker 1: or watch us live on YouTube.

463
00:24:54,340 --> 00:24:56,560
Speaker 4: To last, keep in track with us, the Yardeni Research

464
00:24:56,600 --> 00:25:00,220
Speaker 4: this morning, and they've got a blistering note out post-election.

465
00:25:00,260 --> 00:25:03,480
Speaker 4: To be clear here, you're still in the equity market.

466
00:25:03,720 --> 00:25:07,910
Speaker 4: You're still long the Yardeni roaring 20s, even after this election.

467
00:25:07,930 --> 00:25:09,169
Speaker 6: We absolutely are. Yes, sir.

468
00:25:10,030 --> 00:25:14,510
Speaker 9: We think there has been a sell-off on Wednesday following

469
00:25:14,570 --> 00:25:17,550
Speaker 9: the elections. We think investors have been a bit quick

470
00:25:17,609 --> 00:25:20,550
Speaker 9: to price in that there is going to be this

471
00:25:20,650 --> 00:25:24,390
Speaker 9: roadblock to the AI investment boom. Look, we think there

472
00:25:24,430 --> 00:25:26,760
Speaker 9: are going to be constraints. We split them up into

473
00:25:26,820 --> 00:25:31,100
Speaker 9: three main constraints to the build-out, financial constraints, political constraints,

474
00:25:31,160 --> 00:25:33,580
Speaker 9: and physical constraints. But we think there are going to

475
00:25:33,619 --> 00:25:36,700
Speaker 9: be speed bumps on the path of the AI investment

476
00:25:36,720 --> 00:25:39,230
Speaker 9: boom and not roadblocks. So we are quite optimistic.

477
00:25:40,200 --> 00:25:42,350
Speaker 2: Are we undergoing, you know, I know it's a shift

478
00:25:42,390 --> 00:25:44,189
Speaker 2: in sentiment, but is it a beta regime shift where

479
00:25:44,210 --> 00:25:45,910
Speaker 2: we're witnessing here? I mean, I'm seeing the low vol

480
00:25:45,930 --> 00:25:49,530
Speaker 2: style in equities, you know, rallying here. I'm seeing bonds

481
00:25:49,570 --> 00:25:51,740
Speaker 2: coming off. I mean, I'm seeing oil prices come up.

482
00:25:51,740 --> 00:25:53,659
Speaker 2: I mean, talk to us about the beta regime. How

483
00:25:53,680 --> 00:25:56,300
Speaker 2: does that factor into your, you know, asset allocation view?

484
00:25:56,580 --> 00:25:56,699
Speaker 7: Mm-hmm.

485
00:25:57,880 --> 00:26:00,620
Speaker 9: Something Ed Yardeni is very good at is really separating

486
00:26:00,859 --> 00:26:04,780
Speaker 9: signal from noise. That's something I've learned from him. And

487
00:26:05,100 --> 00:26:08,480
Speaker 9: despite all of the volatility that we're currently seeing, we're

488
00:26:08,500 --> 00:26:11,980
Speaker 9: sticking to our 7900 target for the S & P

489
00:26:11,980 --> 00:26:15,580
Speaker 9: 500 by year end, 8400 by mid next year. That

490
00:26:15,720 --> 00:26:17,080
Speaker 9: continues to be our anticipation.

491
00:26:17,600 --> 00:26:20,000
Speaker 2: Well, I mean, look, but earnings yields are still, even

492
00:26:20,020 --> 00:26:22,040
Speaker 2: though we've seen this, you know, the sell-off in rates,

493
00:26:22,080 --> 00:26:24,889
Speaker 2: I mean, you know, earnings yields are still so, so low. So,

494
00:26:24,950 --> 00:26:27,869
Speaker 2: on a valuation perspective, on a quality perspective, you know,

495
00:26:28,130 --> 00:26:29,629
Speaker 2: talk to us about that. Is it going to be tech?

496
00:26:29,710 --> 00:26:31,590
Speaker 2: Is it leaning into tech here? Is it leaning into growth?

497
00:26:31,650 --> 00:26:32,690
Speaker 2: Is that how we get to those numbers?

498
00:26:33,040 --> 00:26:34,220
Speaker 6: Yeah, absolutely. Great question.

499
00:26:34,300 --> 00:26:37,140
Speaker 9: So, we think what we have seen throughout this year, essentially,

500
00:26:37,200 --> 00:26:41,180
Speaker 9: is this tug-of-war. between FIMO and FOMO. We have seen

501
00:26:41,240 --> 00:26:44,930
Speaker 9: fabulous earnings momentum surge, but the fear of missing out,

502
00:26:45,070 --> 00:26:47,929
Speaker 9: so the PE multiple has contracted quite a bit. We

503
00:26:47,970 --> 00:26:51,100
Speaker 9: think you may actually see a reversal of that throughout

504
00:26:51,130 --> 00:26:53,080
Speaker 9: the rest of the year, because when you look at

505
00:26:53,140 --> 00:27:00,940
Speaker 9: current analysts' earnings expectations, they're assuming 2028 EPS at $ 495.

506
00:26:59,740 --> 00:27:04,729
Speaker 9: Our 2028 EPS is only $ 450. So there's a $ 45

507
00:27:04,170 --> 00:27:06,830
Speaker 9: delta there. So we do think there is some irrational

508
00:27:06,869 --> 00:27:09,450
Speaker 9: exuberance in earnings that is expected to come in a

509
00:27:09,470 --> 00:27:12,300
Speaker 9: little bit. But maybe that then allows the multiple to

510
00:27:12,619 --> 00:27:15,480
Speaker 9: lift as investors feel more comfortable about the earnings.

511
00:27:15,560 --> 00:27:19,760
Speaker 4: The hallmark of your Denny research is Yale economics into

512
00:27:19,820 --> 00:27:23,880
Speaker 4: the stock market as well. The underpinning of a street

513
00:27:24,000 --> 00:27:27,239
Speaker 4: earnings number, which I can't frame it's such a big number,

514
00:27:27,830 --> 00:27:32,469
Speaker 4: or Ed Yardeni and Elias Grippentag's more responsible number, is

515
00:27:32,510 --> 00:27:37,350
Speaker 4: a continued boom economy. That's the core Yardeni thesis. Is

516
00:27:37,530 --> 00:27:39,470
Speaker 4: any of that subdued or broken?

517
00:27:39,950 --> 00:27:42,800
Speaker 9: No, we don't think so. So we split this economic

518
00:27:42,859 --> 00:27:46,359
Speaker 9: resilience in three pillars. You have a very strong consumer

519
00:27:46,520 --> 00:27:48,619
Speaker 9: because of a labor market that is resilient because of

520
00:27:48,640 --> 00:27:51,840
Speaker 9: the wealth effect. When you look at second quarter net worth...

521
00:27:51,940 --> 00:27:54,440
Speaker 9: It's surged by a record amount. Then you look at

522
00:27:54,500 --> 00:27:57,420
Speaker 9: business spending that is also still very resilient. We think

523
00:27:57,460 --> 00:28:00,990
Speaker 9: the AI investment boom will continue, albeit at a slower pace.

524
00:28:01,410 --> 00:28:04,070
Speaker 9: And then you have the government with a 6% fiscal

525
00:28:04,090 --> 00:28:08,730
Speaker 9: deficit during an economic expansion. So the government is printing money,

526
00:28:08,810 --> 00:28:12,690
Speaker 9: is injecting money into the economy during an economic expansion.

527
00:28:12,800 --> 00:28:15,260
Speaker 9: And that is also adding to the fuel that we're

528
00:28:15,300 --> 00:28:16,240
Speaker 9: seeing in this economy.

529
00:28:17,030 --> 00:28:18,760
Speaker 2: I know Ed and the team are bullish on equities,

530
00:28:18,780 --> 00:28:20,419
Speaker 2: but what if you wanted to be defensive? I mean,

531
00:28:20,500 --> 00:28:22,440
Speaker 2: I'm a big baby. I don't believe in this whole

532
00:28:22,460 --> 00:28:25,440
Speaker 2: tech thing, let's just say. And what sectors, where do

533
00:28:25,460 --> 00:28:26,649
Speaker 2: you go if you want to hide out in the

534
00:28:26,690 --> 00:28:28,930
Speaker 2: current environment? We know the Japanese and the Swiss franc

535
00:28:28,950 --> 00:28:32,090
Speaker 2: haven't kind of behaved as they normally would, historically speaking.

536
00:28:32,190 --> 00:28:34,260
Speaker 2: I mean, where do you go? Do you go to utilities?

537
00:28:34,280 --> 00:28:34,619
Speaker 2: Where do you go?

538
00:28:35,680 --> 00:28:39,130
Speaker 9: Diversification is a beautiful thing. So what we have seen

539
00:28:39,150 --> 00:28:42,310
Speaker 9: throughout this year, a pretty strong correlation between oil prices

540
00:28:42,350 --> 00:28:44,850
Speaker 9: and the 10-year. It turns out that the biggest driver

541
00:28:44,890 --> 00:28:48,320
Speaker 9: of the 10-year probably is the AI trade. So very

542
00:28:48,360 --> 00:28:51,360
Speaker 9: strong correlation between the 10-year and the NASDAQ. So we

543
00:28:51,420 --> 00:28:54,040
Speaker 9: think if you expect the AI investment boom to slow,

544
00:28:54,160 --> 00:28:57,640
Speaker 9: which is likely then going to suppress economic activity, bond

545
00:28:57,680 --> 00:28:59,240
Speaker 9: yields are the place to be.

546
00:28:59,270 --> 00:29:01,280
Speaker 6: The 10-year is the place to be.

547
00:29:02,040 --> 00:29:04,920
Speaker 2: So we just saw, obviously, the rally in U.S. Treasuries,

548
00:29:04,960 --> 00:29:06,980
Speaker 2: you know, yields are down. You know, what side of

549
00:29:07,010 --> 00:29:09,350
Speaker 2: the dollar smile was really causing that? I mean, do

550
00:29:09,370 --> 00:29:11,570
Speaker 2: you see it being, you know, this flight to quality,

551
00:29:11,630 --> 00:29:13,350
Speaker 2: the safe haven bid that was driving the bulk of

552
00:29:13,370 --> 00:29:16,870
Speaker 2: that move? Or was it perhaps the echoes of U.S.

553
00:29:16,910 --> 00:29:19,870
Speaker 2: exceptionalism again, this resilient U.S. economy that you, Ed, and

554
00:29:19,890 --> 00:29:21,730
Speaker 2: the team discussed? kind of talk about.

555
00:29:22,370 --> 00:29:24,120
Speaker 6: Do you mean the midterm reaction?

556
00:29:24,600 --> 00:29:27,120
Speaker 2: Well, I'm talking about the last month, month and a half, really,

557
00:29:27,140 --> 00:29:30,200
Speaker 2: where you've seen the U.S. 10-year treasury yield come off

558
00:29:30,260 --> 00:29:31,880
Speaker 2: something on the order of 43 basis points.

559
00:29:31,940 --> 00:29:33,510
Speaker 6: I mean, what was the big driver of that move?

560
00:29:33,660 --> 00:29:35,730
Speaker 9: Yeah, look, we think the 10-year reached a level, it

561
00:29:35,990 --> 00:29:39,410
Speaker 9: turns out, that starts to take some heat out of

562
00:29:39,430 --> 00:29:43,180
Speaker 9: this hot and GDP, right? We started to see financial

563
00:29:43,200 --> 00:29:46,790
Speaker 9: constraints on the AI build-out intensify, and the 10-year started

564
00:29:46,810 --> 00:29:47,120
Speaker 9: to come in.

565
00:29:47,180 --> 00:29:49,010
Speaker 4: I got to get this in. It's too important what

566
00:29:49,030 --> 00:29:54,130
Speaker 4: we're talking about, folks. So price down, yield up. And

567
00:29:54,150 --> 00:29:59,240
Speaker 4: that breaks the economy. Does that assist the Fed in

568
00:29:59,280 --> 00:30:02,420
Speaker 4: a tightening cycle, a la Waller's comments today?

569
00:30:03,000 --> 00:30:05,640
Speaker 6: Great question. And Christopher Waller talked about this.

570
00:30:06,400 --> 00:30:09,870
Speaker 9: Fed Chairman Kevin Walsh talked about this, right, during the

571
00:30:10,370 --> 00:30:14,110
Speaker 9: October FOMC meeting. Financial conditions tightened somewhat. That allows the

572
00:30:14,150 --> 00:30:16,730
Speaker 9: Fed to be slightly more patient here. Look, we think

573
00:30:16,770 --> 00:30:19,110
Speaker 9: the number one job of the Federal Reserve right now

574
00:30:19,170 --> 00:30:21,750
Speaker 9: is to get rates back to neutral. We think the

575
00:30:21,790 --> 00:30:23,950
Speaker 9: neutral interest rate is between four and a quarter and

576
00:30:24,010 --> 00:30:26,270
Speaker 9: four and a half percent. I think that is where

577
00:30:26,310 --> 00:30:28,400
Speaker 9: the Fed needs to get back to. And that's 50

578
00:30:28,400 --> 00:30:29,580
Speaker 9: more basis points of hikes here.

579
00:30:30,000 --> 00:30:32,420
Speaker 4: Elias, thank you so much. Elias Grubentag with us with

580
00:30:32,440 --> 00:30:33,460
Speaker 4: your Denny Research.

581
00:30:33,940 --> 00:30:38,860
Speaker 1: This is the Bloomberg Surveillance Podcast, available on Apple, Spotify,

582
00:30:38,980 --> 00:30:43,230
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583
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584
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