WEBVTT - Yields, Caterpillar, Euro, and the Fed 0:00:00.840 --> 0:00:04.000 Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside 0:00:04.040 --> 0:00:05.240 my co host Matt Miller. 0:00:05.640 --> 0:00:09.600 Every business day, we bring you interviews from CEOs, market pros, 0:00:09.720 --> 0:00:13.600 and Bloomberg experts, along with essential market moving news. 0:00:14.160 --> 0:00:17.279 Find the Bloomberg Markets Podcast on Apple Podcasts or wherever 0:00:17.400 --> 0:00:20.480 you listen to podcasts, and at Bloomberg dot com slash podcast. 0:00:21.000 --> 0:00:23.799 Let's talk to our Jersey here, chief US interest rates strategist. 0:00:24.720 --> 0:00:28.560 I just saw Michael McKee leaving here. He's gonna hop 0:00:28.560 --> 0:00:30.120 on the Assella train, get down and washing it in 0:00:30.200 --> 0:00:32.920 DC for that FED meeting tomorrow where you can heckle 0:00:32.960 --> 0:00:35.879 the chairman with some questions. What do you want to 0:00:35.920 --> 0:00:39.559 hear from FED Chairman Jpal tomorrow after the release of 0:00:39.920 --> 0:00:40.680 the results there? 0:00:41.360 --> 0:00:42.879 Well, what I'd like to hear and what we're not 0:00:42.960 --> 0:00:46.040 going to hear is wind up being what's the Fed's 0:00:46.080 --> 0:00:50.320 reaction function and for when they might cut or raise 0:00:50.360 --> 0:00:54.600 interest rates? Obviously, if inflation accelerates meaningfully, they'll raise interest 0:00:54.680 --> 0:00:57.440 rates again. They've already mentioned that that they might have 0:00:57.520 --> 0:01:00.640 to do more if inflation does except right, although we 0:01:00.680 --> 0:01:02.680 got some data today that seems like maybe it is 0:01:02.720 --> 0:01:05.480 going to moderate a little bit, but really, you know, 0:01:05.520 --> 0:01:07.240 what will it take for them to cut? And I 0:01:07.240 --> 0:01:10.360 think that the idea that they're going to remain at 0:01:10.360 --> 0:01:13.320 the peak for some time, which they've hounded on, it 0:01:13.360 --> 0:01:15.360 would be helpful for them, I think. 0:01:15.200 --> 0:01:17.720 To basically be a little bit more explicit, like, look. 0:01:17.560 --> 0:01:20.840 We're not cutting unless the unemployment rate is you know, 0:01:21.040 --> 0:01:23.119 three four percentage points higher than where it. 0:01:23.040 --> 0:01:25.039 Is and inflation is close to our target. 0:01:25.120 --> 0:01:28.360 Right, So saying something like that, which isn't completely explicit, 0:01:29.000 --> 0:01:33.240 is but it still has some meaning around it for markets. 0:01:33.280 --> 0:01:36.000 I think that that would be helpful for the FED 0:01:36.080 --> 0:01:38.399 to maintain monetary policy at this page. 0:01:38.400 --> 0:01:43.320 Close to our target is weak talk week talk weak sauce, right, 0:01:43.400 --> 0:01:45.800 I mean, do you want a hawkish Why don't they say, like, 0:01:46.200 --> 0:01:50.160 we want to get to two percent two hour target? 0:01:50.920 --> 0:01:52.000 You know, I mean at. 0:01:52.000 --> 0:01:56.600 Least for six months or a year. I mean, weren't 0:01:56.600 --> 0:01:59.160 they trying to average long term average two percent? 0:01:59.760 --> 0:02:01.640 And how many decades would that take? 0:02:02.320 --> 0:02:04.320 Yeah, well, that was our old framework. It wouldn't take 0:02:04.360 --> 0:02:06.720 you know, it wouldn't take that long because we remember 0:02:06.720 --> 0:02:09.840 we were at under two percent at least for quite 0:02:09.840 --> 0:02:12.679 a while in the last decade. I think the the 0:02:13.400 --> 0:02:15.200 thing for the FED though, is that if look, if 0:02:15.280 --> 0:02:18.000 inflation is two point seven percent, two point six percent, 0:02:18.000 --> 0:02:20.400 two point five percent trending lower, and you had a 0:02:20.440 --> 0:02:24.480 real spike in unemployment, then everyone would be forecasting inflation to. 0:02:24.440 --> 0:02:25.800 Be significantly lower, right. 0:02:25.840 --> 0:02:28.360 And I think that's the reason why they can say 0:02:28.400 --> 0:02:30.880 like near our target or approaching our target, right, something 0:02:30.919 --> 0:02:33.679 like that. So the FED doesn't like to be as 0:02:33.720 --> 0:02:37.680 explicit as saying, look, we will cut interest rates if 0:02:37.720 --> 0:02:41.960 the unemployment rate is above five percent and unemployment and 0:02:42.240 --> 0:02:45.000 inflation is at two percent if they won't be as 0:02:45.000 --> 0:02:47.440 explicit as that, because they want to leave themselves flexibility 0:02:47.480 --> 0:02:50.680 in case there's a crisis, if there's you know, massive 0:02:50.720 --> 0:02:53.880 corporate defaults for example, and unemployment spikes, but you still 0:02:53.880 --> 0:02:56.760 have you know, year of a year inflation hasn't fallen 0:02:56.760 --> 0:02:59.400 off a cliff. Yet they always want to leave some 0:02:59.480 --> 0:03:02.519 of that flexibility. But you know what's interesting about the 0:03:02.520 --> 0:03:04.919 FED is it's that little minution detail. It's going to 0:03:05.000 --> 0:03:07.520 matter because the Fed's probably not going to do anything tomorrow. 0:03:08.200 --> 0:03:10.240 The Treasury Department, though, at eight thirty in the morning, 0:03:10.280 --> 0:03:12.560 is going to give us some information that might actually 0:03:12.560 --> 0:03:13.320 be market moving. 0:03:13.880 --> 0:03:18.360 So yeah, I mean, yesterday we heard from I guess 0:03:18.400 --> 0:03:22.840 Treasury that they need about what eight hundred billion dollars 0:03:23.200 --> 0:03:24.279 in this quarter. 0:03:24.800 --> 0:03:27.519 Seven hundred and seventy six billion in this quarter of 0:03:27.720 --> 0:03:32.800 of net debt rays. Effectively, that's a little bit higher 0:03:32.840 --> 0:03:35.080 than what our expectation was, a little bit lower than 0:03:35.120 --> 0:03:38.880 most expectations, and the reason is is that they want 0:03:38.920 --> 0:03:41.120 to keep this pretty big cash balance. They want to 0:03:41.160 --> 0:03:44.320 keep a cash balance of around seven hundred and fifty 0:03:44.360 --> 0:03:45.000 billion dollars. 0:03:45.040 --> 0:03:47.800 So in order to do that, with Social Security. 0:03:47.360 --> 0:03:54.240 Payments coming and additional additional payments for medicare as well 0:03:54.320 --> 0:03:57.880 as just just general government deficits, not to mention interest 0:03:58.040 --> 0:04:00.440 payments on the debt, they're going to have to raise, 0:04:01.160 --> 0:04:02.440 you know, quite a lot of money. 0:04:02.600 --> 0:04:02.840 Now. 0:04:02.880 --> 0:04:06.120 Interestingly, remember that seven hundred and seventy six billion dollars 0:04:06.160 --> 0:04:08.800 is what they're selling to the public. It's actually not 0:04:08.920 --> 0:04:12.480 the total debt that's being raised because there's non marketable debts, 0:04:12.520 --> 0:04:14.680 so debt from the Social Security Trust Fund and some 0:04:14.760 --> 0:04:17.280 other trust funds that are being paid down. So what 0:04:17.320 --> 0:04:19.920 you'll see is a deficit for the quarter of around 0:04:19.960 --> 0:04:21.400 half half a trillion dollars. 0:04:21.480 --> 0:04:22.760 Round five hundred billion dollars. 0:04:23.360 --> 0:04:25.600 But you'll but the actual debt that they need to 0:04:25.640 --> 0:04:27.760 raise is much more than that because of the things 0:04:27.760 --> 0:04:28.479 that we've known. 0:04:28.360 --> 0:04:29.120 For thirty years. 0:04:29.160 --> 0:04:31.920 Right, the Sochi Security Trust Fund is is a is 0:04:31.960 --> 0:04:34.640 a net negative and that has to be funded out 0:04:34.640 --> 0:04:38.159 of out of general revenue. So it's it's you know, 0:04:38.200 --> 0:04:40.320 it's all the problems that we've seen over the last 0:04:40.320 --> 0:04:42.159 twenty five years, and we said we're going to be 0:04:42.160 --> 0:04:44.480 problems for the government debt are actually coming home to 0:04:44.560 --> 0:04:45.080 roost right now. 0:04:45.080 --> 0:04:47.120 So I right, I mean, nobody likes to ignore treasury 0:04:47.120 --> 0:04:49.479 auctions more than me. Will you tell me i'd have 0:04:49.480 --> 0:04:50.360 to pay attention to this. 0:04:51.120 --> 0:04:54.240 Well, they've been important, they've been market moving events. When 0:04:54.279 --> 0:04:58.279 you look at auction demand the last couple of weeks, 0:04:58.279 --> 0:04:59.719 they've they've started to slip a. 0:04:59.680 --> 0:05:01.640 Little on on on average. 0:05:02.400 --> 0:05:05.600 We last week, for example, we had pretty weak auctions 0:05:05.640 --> 0:05:07.680 for two year debt and five year notes, but the 0:05:07.720 --> 0:05:10.839 seven year on Thursday one. Okay, But I would say 0:05:10.839 --> 0:05:13.400 that demand is much more mixed. Prior to this past 0:05:13.880 --> 0:05:16.560 month or so, we actually had pretty decent demand at 0:05:16.560 --> 0:05:19.240 auctions people, where I think we're taking advantage of the selloff. 0:05:19.279 --> 0:05:21.000 We you know, hit five percent. 0:05:20.680 --> 0:05:23.479 On ten year notes, and people had, you know, taking 0:05:23.520 --> 0:05:26.160 a little stab at maybe owning a little bit more 0:05:26.160 --> 0:05:28.760 on at auction. So, yeah, we need to see if 0:05:29.080 --> 0:05:32.960 demand is maintained, particularly since tomorrow morning with all of 0:05:32.960 --> 0:05:35.520 that seven hundred billion dollars of debt that needs to 0:05:35.520 --> 0:05:38.520 be raised, there's going to have to the government's going 0:05:38.560 --> 0:05:41.240 to have to increase the size of auctions almost across 0:05:41.279 --> 0:05:41.719 the board. 0:05:43.040 --> 0:05:45.560 So I'm looking at the two tens. That's another thing 0:05:45.600 --> 0:05:49.240 you got me looking at. Unfortunately still inverted, but you know, 0:05:49.440 --> 0:05:51.520 much less than it was before, not only about you know, 0:05:51.560 --> 0:05:54.600 twenty basis points or so are we going to get 0:05:54.600 --> 0:05:56.719 to a point where we actually have longer term yields 0:05:56.760 --> 0:05:58.000 higher than shorter term yields. 0:05:59.200 --> 0:06:01.560 Yeah, I think I think we will, and it will 0:06:01.560 --> 0:06:03.160 probably happen early next year. 0:06:03.920 --> 0:06:05.200 I think it really depends. Though. 0:06:05.760 --> 0:06:08.200 The important nuance of that is, is it because two 0:06:08.279 --> 0:06:11.440 year yields go down a lot, So do we have 0:06:11.760 --> 0:06:14.520 a weakening economy? As Ana Wog and the Bloomberg Economics 0:06:14.520 --> 0:06:18.839 team correct, And if we do have a meaningful slowdown 0:06:18.839 --> 0:06:21.880 in the economy, we could probably see two year yields 0:06:21.960 --> 0:06:24.600 go down, you know, twenty five fifty basis points and 0:06:24.640 --> 0:06:26.719 ten year yields go down less than that, and that's 0:06:26.760 --> 0:06:29.280 how you wind up getting that positively sloped yield curve. 0:06:29.760 --> 0:06:32.680 On the other side, if the if the economy stays 0:06:32.720 --> 0:06:35.880 reasonably robust, but only because we have all of this 0:06:36.040 --> 0:06:39.000 debt issuance, you could see, you know, ten year yields 0:06:39.000 --> 0:06:42.440 maybe up above five percent, up to five point two 0:06:42.520 --> 0:06:45.279 five five point three percent, and that could you know, 0:06:45.360 --> 0:06:47.080 uninvert the yield curve, And that would not. 0:06:47.080 --> 0:06:48.240 Surprise me at all. 0:06:48.279 --> 0:06:51.320 In fact, we actually think that we're we are in 0:06:51.360 --> 0:06:54.520 the process of completely uninverting and we do expect to 0:06:54.520 --> 0:06:57.000 see a positively slope yield curve sometime over the next 0:06:57.000 --> 0:06:57.520 twelve months. 0:06:57.560 --> 0:07:01.760 You raise an interesting point that Treasury Secretary Janet Yellen 0:07:01.880 --> 0:07:04.840 last week she said, the reason we have high yields 0:07:05.000 --> 0:07:07.840 is not to do with the debt and deficits, nothing 0:07:07.880 --> 0:07:08.440 to do with that. 0:07:08.520 --> 0:07:09.920 Look away from there, don't look there. 0:07:10.920 --> 0:07:14.800 It's because of the strength of the economy, because of Bidenomics, 0:07:14.840 --> 0:07:17.920 from the middle out, from the what is it middle out, 0:07:17.960 --> 0:07:21.680 and I can't remember, he says, he has a catchphrase 0:07:21.680 --> 0:07:24.400 that he uses bottom up and middle out. That's what 0:07:24.480 --> 0:07:28.360 it is So is that the case? And will we 0:07:28.560 --> 0:07:32.800 know from you know, the refunding how much of the 0:07:32.920 --> 0:07:37.440 rise in yields is due to you know, the high 0:07:37.520 --> 0:07:39.240 debt and deficits, and how much of it is due 0:07:39.280 --> 0:07:40.520 to the speeding economy. 0:07:41.440 --> 0:07:43.480 Yeah, these are only things that can be estimated. But 0:07:43.640 --> 0:07:46.120 our estimate is that around ninety two percent of the 0:07:46.200 --> 0:07:49.760 move from the July FED meeting to present in the 0:07:49.800 --> 0:07:53.320 tenure yield has been due to the shift in FED expectations. 0:07:53.760 --> 0:07:55.840 And so if you go and you look at what 0:07:56.080 --> 0:07:58.960 the expectation is that the market's been pricing. We were 0:07:58.960 --> 0:08:01.640 pricing for two and a half percent FED funds rate 0:08:01.680 --> 0:08:04.440 in twenty twenty five, We're now pricing for four percent 0:08:04.680 --> 0:08:06.760 in twenty twenty five. So that's a huge move, right, 0:08:06.840 --> 0:08:08.880 I talk about a one hundred and fifty basis point 0:08:08.920 --> 0:08:11.440 move up in where the FED is going to cut 0:08:11.480 --> 0:08:13.840 to or you know, where the market thinks it's going 0:08:13.840 --> 0:08:16.320 to cut to. So that had to manifest itself all 0:08:16.320 --> 0:08:19.640 throughout the treasury curve, and in particular in the longer end, 0:08:19.720 --> 0:08:22.880 because the longer end was anticipating rates to be much 0:08:22.920 --> 0:08:25.000 lower and policy rates to be much lower a few 0:08:25.080 --> 0:08:28.600 years from now, so I think, I think the debt 0:08:28.680 --> 0:08:31.240 dynamics have do have some effect, and they certainly have 0:08:31.280 --> 0:08:33.360 effect on liquidity, but I. 0:08:33.320 --> 0:08:35.440 Forget to just leave it there. But we appreciate that. 0:08:35.480 --> 0:08:38.839 Ira Jersey, Chief US Interest Rate Strategies for Bloomberg Intelligence. 0:08:40.120 --> 0:08:43.520 You're listening to the teenth Ken's Are Live program Bloomberg 0:08:43.559 --> 0:08:46.920 Markets weekdays at ten am Eastern on Bloomberg dot com, 0:08:47.040 --> 0:08:50.160 the iHeartRadio app and the Bloomberg Business app, or listen 0:08:50.240 --> 0:08:52.360 on demand wherever you get your podcasts. 0:08:54.080 --> 0:08:56.959 Caterpillar they make the big tractors and all that kind 0:08:57.000 --> 0:09:00.120 of good stuff back hose. They reported some numbers today 0:09:00.120 --> 0:09:02.280 which were in line, I guess, pretty solid. But it's 0:09:02.320 --> 0:09:06.080 all about the outlook for these long cycle industrial companies 0:09:06.080 --> 0:09:08.439 and that's what's got some investors spook here. As John mentioned, 0:09:08.440 --> 0:09:10.920 is stocks down about five percent here today. Let's break 0:09:10.960 --> 0:09:13.320 it down with the man who knows what's happening with 0:09:13.679 --> 0:09:16.120 this company, Chris Chield. You know he covers the big 0:09:16.120 --> 0:09:19.600 industrial companies for Bloomberg Intelligence. He's located down in Princeton, 0:09:19.640 --> 0:09:24.400 New Jersey, the HQ if you will of a Bloomberg Intelligence. Hey, Chris, 0:09:24.400 --> 0:09:27.840 talk to us about Caterpillar you've been calling on I 0:09:27.880 --> 0:09:30.319 know in the last a few quarters we've been speaking 0:09:30.360 --> 0:09:33.080 to you about Boy, these companies are putting up great numbers, 0:09:33.080 --> 0:09:35.520 but investors are really looking forward and they're a little 0:09:35.559 --> 0:09:38.040 bit concerned that seemed to come to fruition here today. 0:09:38.120 --> 0:09:40.959 What'd you see, Yeah, I mean to your point, I mean, 0:09:40.960 --> 0:09:43.600 the quarter was fine, actually was quite good, with better 0:09:43.679 --> 0:09:47.160 than expected margin performance and earnings. You know, pricing continues 0:09:47.200 --> 0:09:49.360 to be really strong, but what we saw was a 0:09:49.400 --> 0:09:53.479 pretty broad deterioration when it comes to their leading indicators, 0:09:53.520 --> 0:09:55.960 you know, backlog fail for the first time in three years. 0:09:56.360 --> 0:09:59.680 Implied orders also dropped sequentially in year over year, and 0:09:59.679 --> 0:10:02.840 they're fourth quarter sales outlook was somewhat kind of disappointing 0:10:03.240 --> 0:10:06.720 and below normal seasonality and consensus, and there was a 0:10:06.720 --> 0:10:10.640 fair amount of trepidation about the macro backdrop heading into 0:10:10.679 --> 0:10:13.280 the print. And I think these softer orders and backlog 0:10:13.360 --> 0:10:17.920 trends that we saw aren't necessarily encouraging and what was 0:10:18.000 --> 0:10:21.120 likely to be a softer economic environment next year and 0:10:21.200 --> 0:10:23.760 really just kind of intensify some of those concerns around 0:10:23.800 --> 0:10:24.960 the duration of the cycle. 0:10:25.640 --> 0:10:28.520 Yeah, So we saw the year on year decline of 0:10:29.160 --> 0:10:33.800 one point nine billion dollars in the backlog. What exactly 0:10:33.840 --> 0:10:38.320 does that mean? Does that mean you know exactly what 0:10:38.360 --> 0:10:41.120 I think it does that they had orders that were 0:10:41.120 --> 0:10:43.520 that much lower? I mean, how much were there was 0:10:43.559 --> 0:10:44.560 the backlog in total? 0:10:45.800 --> 0:10:49.000 Yeah, So I would say the moderation in the backlog 0:10:49.480 --> 0:10:52.200 wasn't necessarily surprised, and I think it was somewhat to 0:10:52.240 --> 0:10:55.800 be expected, just giving normalizing supply chains and some of 0:10:55.840 --> 0:10:59.320 the lead time shrinking with some of the product availability. 0:10:59.360 --> 0:11:01.880 But I think the magnitude of the decline was kind 0:11:01.880 --> 0:11:04.680 of what spook people, particularly on the order front. Orders 0:11:04.720 --> 0:11:08.040 were down about fifteen percent versus prior year and twenty 0:11:08.080 --> 0:11:11.520 percent sequentially. So I think that sheer magnitude and just 0:11:11.559 --> 0:11:12.640 the optics of But. 0:11:12.559 --> 0:11:14.760 What's the magnitude of the Is a one point nine 0:11:14.760 --> 0:11:17.520 billion dollar drop a ten percent drop in the backlog? 0:11:17.640 --> 0:11:19.440 Or is it a fifty percent drop in the backlog? 0:11:19.559 --> 0:11:22.640 No, it's it's an eight and a half percent decline sequentially. 0:11:22.800 --> 0:11:25.120 So while not but. 0:11:25.080 --> 0:11:27.679 It's the first time we've seen backlogs essentially peaked. 0:11:27.679 --> 0:11:30.040 This is the first time sequentially We're not talking about 0:11:30.040 --> 0:11:31.120 the year over year drop. 0:11:31.440 --> 0:11:33.319 Yeah right, Yeah, that's I could see how that was 0:11:33.360 --> 0:11:36.480 spook people. What's Kat saying about, like, which, are there 0:11:36.480 --> 0:11:39.920 any particular customer segments that are maybe weaker than expected? 0:11:40.640 --> 0:11:42.120 What are they saying about kind of where this might 0:11:42.160 --> 0:11:43.440 be coming from. 0:11:43.679 --> 0:11:47.840 Yeah, I think I'll actually maybe start on the construction side. 0:11:47.880 --> 0:11:51.080 I think that was one positive surprise, particularly in North America. 0:11:51.160 --> 0:11:54.720 North America continues to be quite resilient, and end user 0:11:54.760 --> 0:11:58.080 demand continues to be pretty strong really across their business. 0:11:58.760 --> 0:12:01.320 The energy and transportation business came in a little bit 0:12:01.320 --> 0:12:04.599 weaker than we had anticipated, and it's some there was 0:12:04.640 --> 0:12:07.559 some softness on the mining side on the top line, 0:12:07.880 --> 0:12:10.520 it seems to be some timing issues, but also there 0:12:10.520 --> 0:12:13.079 was some weakness in the aftermarket business, which was a 0:12:13.120 --> 0:12:15.200 little surprising just given the age of the fleet and 0:12:15.280 --> 0:12:18.520 utilization still remains quite high. So those bear kind of 0:12:18.559 --> 0:12:19.720 watching going forward here. 0:12:20.400 --> 0:12:23.280 So it give us a sense of a cycle here 0:12:23.280 --> 0:12:26.880 for like a Caterpillar. I mean, you said, this is 0:12:26.920 --> 0:12:29.040 the first time in three years they've had down order. Sequentially, 0:12:29.080 --> 0:12:31.280 that sounds like a pretty good cycle, But is it 0:12:31.320 --> 0:12:33.720 our downcycles similarly like in length? 0:12:35.240 --> 0:12:37.760 No, as much as we like to think every cycle 0:12:37.840 --> 0:12:39.680 is the same, they tend to be different. And I 0:12:39.679 --> 0:12:43.600 would say, you know, even though backlog had peaked here, 0:12:44.200 --> 0:12:47.360 you know, we are still at historically very elevated levels 0:12:47.360 --> 0:12:50.120 and there is really above average production visibility as we 0:12:50.160 --> 0:12:53.640 look forward to next year. But the optics are I mean, 0:12:53.679 --> 0:12:56.720 you have a really a cyclical company with declining orders 0:12:56.720 --> 0:13:00.480 a declining backlog. It doesn't just the optic of that 0:13:00.559 --> 0:13:03.240 are not a favorable setup for the company moving into 0:13:03.280 --> 0:13:03.679 next year. 0:13:03.760 --> 0:13:07.400 How about the Inflation Reduction Act. Isn't that like lots 0:13:07.400 --> 0:13:09.600 of Caterpillar type stuff you need? 0:13:11.160 --> 0:13:14.959 So it is, And I guess one of the caveats 0:13:14.960 --> 0:13:17.160 with this cycle is it's different because we just have 0:13:17.200 --> 0:13:19.840 an immense amount of fiscal stimulus coming through the pipe, 0:13:20.160 --> 0:13:21.800 and I'd say a lot of that has really kind 0:13:21.800 --> 0:13:25.160 of yet to materialize to the financial results of a 0:13:25.200 --> 0:13:27.480 lot of these companies and as part of what's propping 0:13:27.559 --> 0:13:30.120 up the backlog here. So I think that does help 0:13:30.160 --> 0:13:33.200 provide an offset. I think some of the decline is 0:13:33.280 --> 0:13:37.400 certainly attributable to the normalizing supply chain and shrinking lead time, 0:13:37.480 --> 0:13:41.560 So maybe a little bit of an overreaction, but yeah, 0:13:41.720 --> 0:13:44.280 this will certainly provide a multi year tail wind for 0:13:44.400 --> 0:13:46.800 the company and really probably provides a little bit more 0:13:46.840 --> 0:13:49.520 of a favorable outlook for a lot of the construction 0:13:49.640 --> 0:13:53.600 machinery producers relative to some of the other machinery and markets. 0:13:54.240 --> 0:13:57.640 What are the biggest competitors and do they face a 0:13:57.679 --> 0:14:00.400 threat there? I mean, I look through all the on 0:14:00.440 --> 0:14:02.520 the r V page on the Bloomberg and I don't 0:14:02.520 --> 0:14:05.680 see anything that really stands out as you know, a 0:14:05.720 --> 0:14:09.160 household name other than maybe Mitsubishi. 0:14:10.000 --> 0:14:12.959 But you know, who are they facing off against? 0:14:14.120 --> 0:14:16.720 Yeah, so, I mean, they're the undisputed leader in the 0:14:16.720 --> 0:14:20.480 construction machinery space. When it comes to mining, it's essentially 0:14:20.480 --> 0:14:23.280 a duopoly with them in Kamatsu, and Kamatsu is a 0:14:23.520 --> 0:14:27.560 pretty significant player on the construction side as well. Everyone 0:14:27.560 --> 0:14:30.240 else tends to be subscale. They do compete with Deer 0:14:30.280 --> 0:14:34.520 also on construction. They're starting to grow their construction business, 0:14:34.560 --> 0:14:37.000 so I would expect them to be a more formidable 0:14:37.040 --> 0:14:40.880 competitor in the years to come. But really it's kat 0:14:40.920 --> 0:14:43.960 and Kamatsu. Those are the dominant forces in the market. 0:14:44.360 --> 0:14:48.640 How about geographies, Chris, particularly China. What's their exposure to 0:14:48.720 --> 0:14:50.640 China and what are they saying about China. 0:14:51.400 --> 0:14:55.000 China's weak and continues to weaken really no signs of 0:14:55.320 --> 0:14:58.320 a turnaround yet. So you know, historically China has been 0:14:58.560 --> 0:15:01.800 roughly ten to ten five to ten percent of consolidated 0:15:01.840 --> 0:15:04.440 sales at Caterpillar. This year, we're going to be well 0:15:04.480 --> 0:15:07.560 below the five percent in the lowest and quite some time. 0:15:07.640 --> 0:15:09.960 Not really hearing any sort of optimism coming out of 0:15:09.960 --> 0:15:10.480 that region. 0:15:11.520 --> 0:15:13.120 And how about Europe, because I know I can see 0:15:13.120 --> 0:15:18.440 here on the p GEO page that's EAM is about 0:15:18.440 --> 0:15:21.440 twenty percent of revenue. What are they seeing out of Europe? 0:15:21.440 --> 0:15:24.320 Because I know people are concerned about that, those economies 0:15:24.360 --> 0:15:24.840 over there. 0:15:25.560 --> 0:15:27.360 Yeah, and you know that actually held up a little 0:15:27.360 --> 0:15:30.040 better than I had anticipated. We're just starting to hear 0:15:30.040 --> 0:15:32.280 this earning season from a number of number of other 0:15:32.320 --> 0:15:36.160 machinery producers that there had been some weakening and the 0:15:36.240 --> 0:15:39.520 sentiment over in Europe and even some softer orders. Didn't 0:15:39.520 --> 0:15:42.400 really get that coming out of cat and some of 0:15:42.440 --> 0:15:47.240 their retail sales trends didn't seem to suggest a significant 0:15:47.280 --> 0:15:50.800 deterioration there yet. So again another item worth kind of 0:15:50.800 --> 0:15:51.840 monitoring moving forward. 0:15:52.080 --> 0:15:55.160 We just saw the Eurostat growth figures, by the way, Paul, 0:15:55.600 --> 0:16:01.280 so the European economy contracted zero point one percent in 0:16:01.680 --> 0:16:04.320 the third quarter, and we were looking for just a segnation, 0:16:04.760 --> 0:16:07.960 So it's getting smaller there. I guess consumer prices are 0:16:07.960 --> 0:16:09.960 coming down, which is good. They got a two handle 0:16:10.000 --> 0:16:11.600 on them, two point nine percent in October. 0:16:11.680 --> 0:16:15.280 Okay, yeah, hey, Chris, just looking ahead a little bit. 0:16:15.960 --> 0:16:18.800 My good friends at John Dear the nice Green Tractors 0:16:18.800 --> 0:16:21.800 are reporting in a few weeks here, and you know, 0:16:21.840 --> 0:16:23.520 I always load to look at the Deer results because 0:16:23.560 --> 0:16:26.080 it gives you a great handle on kind of how 0:16:26.080 --> 0:16:28.920 the state of the farmer out there, how are things 0:16:29.040 --> 0:16:29.480 at Deer. 0:16:30.960 --> 0:16:33.280 So I think Deer is going to have a more 0:16:33.400 --> 0:16:37.800 challenging setup into twenty twenty four relative to Cat. We 0:16:37.880 --> 0:16:40.520 think the egg market is already peaked, so we're kind 0:16:40.520 --> 0:16:45.960 of anticipating mid digit volume declines next year. Now, remember Deer, 0:16:46.040 --> 0:16:49.040 we'll report their fiscal four Q results later in November, 0:16:49.360 --> 0:16:51.480 so they'll provide the kind of first look at twenty 0:16:51.560 --> 0:16:54.320 twenty four. But we're certainly expecting a lower volume market. 0:16:54.360 --> 0:16:56.640 On the ag side, we're coming off a number of 0:16:56.680 --> 0:17:00.200 strong years, but you're starting to see commodity prices. Is 0:17:00.720 --> 0:17:03.360 a rural crowd often quite a bit farmer income is 0:17:03.360 --> 0:17:05.520 going to be down twenty five percent this year, so 0:17:05.920 --> 0:17:09.000 really i'd say a less favorable outlook on the ag 0:17:09.119 --> 0:17:11.639 side in twenty twenty four and the farmer. 0:17:11.720 --> 0:17:14.280 I mean, when the farmer has cash, he or she 0:17:14.320 --> 0:17:16.960 goes out and buys tractors and stuff like that. But 0:17:17.480 --> 0:17:19.880 it's it's a cyclical business, so the flip side is true. 0:17:19.960 --> 0:17:26.359 Right, Yeah, any the magnitudeers sound pretty draconian, but I 0:17:26.359 --> 0:17:28.560 think we'll still be, you know, second or third highest 0:17:29.119 --> 0:17:33.280 all time in terms of that farm income. So we'll 0:17:33.320 --> 0:17:36.200 be down from a peak in twenty twenty two. It's 0:17:36.200 --> 0:17:38.439 still going to be historically strong. But I would just 0:17:38.480 --> 0:17:41.159 expect farmers to dial back some of the spending just 0:17:41.200 --> 0:17:44.520 given what's going on with some of the farm fundamentals 0:17:44.720 --> 0:17:46.920 and again the weaker crop prices that we've seen. 0:17:47.240 --> 0:17:49.000 All right, great stuff, I'm just gonna deer right now 0:17:49.040 --> 0:17:51.280 in the stocks off about fifteen percent year to date, 0:17:51.320 --> 0:17:54.119 so there's the market discounting good twelve to eighteen months 0:17:54.119 --> 0:17:57.480 in the future. On that name, Chris Chierlino, we always 0:17:57.480 --> 0:17:59.200 appreciate getting a few minutes of his time. He's the 0:17:59.200 --> 0:18:01.520 industrials analysts at Bloomberg Intelligence. 0:18:01.880 --> 0:18:04.920 You're listening to the tape. Ken's our live program Bloomberg 0:18:05.040 --> 0:18:08.639 Markets weekdays at ten am Eastern on Bloomberg Radio, the 0:18:08.680 --> 0:18:11.920 tune in app, Bloomberg dot Com, and the Bloomberg Business App. 0:18:11.960 --> 0:18:14.760 You can also listen live on Amazon Alexa from our 0:18:14.800 --> 0:18:19.200 flagship New York station. Just say Alexa play Bloomberg eleven thirty. 0:18:20.920 --> 0:18:25.040 Looking at Ingo that is the Bloomberg Index browser kind 0:18:25.040 --> 0:18:27.719 of gives you the performance your day, month to day 0:18:27.840 --> 0:18:30.240 of all the big indexes out there, and for the 0:18:30.440 --> 0:18:32.840 fixed income space in the US it is red with 0:18:33.119 --> 0:18:36.679 one exception, US corporate high yield up four point three 0:18:36.760 --> 0:18:38.879 eight percent. Why is that? Let's check out with our 0:18:38.880 --> 0:18:41.560 next guest, Ken Monaghan, co director of high Yield at 0:18:41.560 --> 0:18:46.040 a Mundi US. He's based in Durham, North Carolina, but 0:18:46.160 --> 0:18:48.879 up here in New York. Ken twenty twenty two, as 0:18:48.920 --> 0:18:52.000 we've talked about before, was the mother of all disasters 0:18:52.040 --> 0:18:55.399 for fixed income investors. This year is not much better 0:18:56.160 --> 0:18:58.960 through the first you know, nine ten months. What's going 0:18:58.960 --> 0:19:00.560 on in the corporate high yield mark? Why is that 0:19:00.600 --> 0:19:01.720 showing some positive returns? 0:19:02.119 --> 0:19:04.960 You're right, Paul, I think it's been a reasonable year 0:19:05.040 --> 0:19:09.639 considering how bad we've had in the past, it's a 0:19:09.680 --> 0:19:12.160 decent year, and it's a year where risk is outperformed. 0:19:12.880 --> 0:19:13.120 Now. 0:19:13.440 --> 0:19:15.920 October thus far has been miserable for risk. 0:19:16.000 --> 0:19:18.560 But if you're looking at the year to date, we 0:19:18.600 --> 0:19:21.320 see the triple C credits are up, you know, really 0:19:21.720 --> 0:19:24.160 threefold what double b's are. 0:19:24.680 --> 0:19:26.520 So we've had a fair amount of spread compression. 0:19:27.200 --> 0:19:29.760 So but I mean, everybody's been telling Matt and I 0:19:29.800 --> 0:19:32.880 that we're going to have a recession any day now. 0:19:33.240 --> 0:19:36.120 If that's the case, why are people taking incremental risk 0:19:36.160 --> 0:19:37.919 that they need to that they do when. 0:19:37.760 --> 0:19:38.760 They tie the threads. 0:19:38.800 --> 0:19:41.119 I mean, if you're paying me, I get it. But 0:19:41.160 --> 0:19:42.919 if you're not paying me, why am I buying it? 0:19:43.240 --> 0:19:45.320 Well, if you look at spreads where they are right now, 0:19:45.800 --> 0:19:49.080 arguably they're only at the five and ten year averages, 0:19:49.960 --> 0:19:52.880 so they're not looking particularly cheap. On the other hand, 0:19:53.080 --> 0:19:55.480 that the economy has done pretty well, and I think 0:19:55.520 --> 0:19:57.920 that that's really what's been driving spreads is you know, 0:19:58.000 --> 0:20:00.960 we'd all been waiting or expecting a a recession, whether 0:20:01.000 --> 0:20:03.720 it was in the later half of the back early 0:20:03.760 --> 0:20:05.840 part of the first half of the year, or then 0:20:06.280 --> 0:20:08.400 the back half of this year, and then people are 0:20:08.440 --> 0:20:11.760 forecasting it for early twenty twenty four, and thus far 0:20:12.080 --> 0:20:14.600 the economy continue to power through, and I think that's 0:20:14.640 --> 0:20:15.800 what's been driving spreads. 0:20:15.840 --> 0:20:17.840 But aren't you worried that defaults are going to start 0:20:17.840 --> 0:20:18.360 to pick up? 0:20:18.960 --> 0:20:21.640 Well, interestingly enough, if you look at the Moody's estimates, 0:20:21.640 --> 0:20:24.600 they're expecting defaults will peak sometime or the spring of 0:20:24.640 --> 0:20:27.600 next year, but at a fairly reasonable rate. But let's 0:20:27.640 --> 0:20:30.399 remember when Moody's puts out its number is it is 0:20:30.480 --> 0:20:33.960 an unweighted number, So they count one hundred million dollars 0:20:33.960 --> 0:20:36.720 default the same way they count a billion dollar default. 0:20:36.960 --> 0:20:39.800 If you look at it on an adjusted basis, where 0:20:39.840 --> 0:20:43.040 they're using waitings based on the amount of debt outstanding. 0:20:43.480 --> 0:20:46.680 The default rate for this year is still running under 0:20:46.720 --> 0:20:49.920 two percent. Now they're expecting the default rate to rise 0:20:50.000 --> 0:20:50.400 into the. 0:20:50.359 --> 0:20:53.160 Mid to high fours. But that's a pretty big differential. 0:20:53.200 --> 0:20:55.359 So what it tells us is the companies that are 0:20:55.440 --> 0:20:58.600 getting into more difficulty tend to be smaller companies rather. 0:20:58.440 --> 0:21:00.320 Than larger ones. At this point, it's. 0:21:00.160 --> 0:21:02.520 A new issue market. Like I used to love throwing 0:21:02.520 --> 0:21:04.639 out some high yield from my clients back in the 0:21:04.720 --> 0:21:08.320 day because I love the media, cable paper what's the 0:21:08.560 --> 0:21:10.200 what's the new issue market like these days? 0:21:10.400 --> 0:21:13.000 It's pretty soft right now. Not surprisingly, I think we 0:21:13.040 --> 0:21:16.000 had a pretty robust calendar coming into September and that 0:21:16.040 --> 0:21:18.920 there were a number of companies that had financings, whether 0:21:18.920 --> 0:21:21.119 it was M and A related or LBO related that 0:21:21.200 --> 0:21:23.679 needed to get done, and they got those done. 0:21:23.840 --> 0:21:26.160 But since then, obviously, treasuries. 0:21:25.560 --> 0:21:28.520 Have risen fairly dramatically, and then on the back of 0:21:28.560 --> 0:21:31.760 the fifty beeps treasury move we've had in the last 0:21:31.800 --> 0:21:33.920 four or five weeks, we've had about a seventy five 0:21:33.960 --> 0:21:36.560 basis point widening of high yield. So I think companies 0:21:36.600 --> 0:21:38.840 have taken a step back and said, let's wait a 0:21:38.840 --> 0:21:41.840 minute here, let's hope that spreads get tighter, or hope 0:21:41.840 --> 0:21:44.600 the treasury rates come down and moderate, and we'll find 0:21:44.600 --> 0:21:48.120 a better financing opportunity. Now, the problem with that, from 0:21:48.119 --> 0:21:50.679 our perspective is if you wait too long and we 0:21:50.760 --> 0:21:52.800 are right and we do see more of an economic 0:21:52.880 --> 0:21:56.719 slowdown in twenty twenty four, which is what our expectation is, 0:21:56.960 --> 0:21:59.800 that would imply, as you're suggesting, that spreads ought to 0:21:59.800 --> 0:22:04.280 be wider, not tighter, And if spreads are not wider, 0:22:04.320 --> 0:22:07.000 then the FEDS likely to keep its foot on their 0:22:07.000 --> 0:22:09.920 break pretty hard, because that says the economy is powering 0:22:10.240 --> 0:22:13.440 along too strongly and they're going to have to react. 0:22:13.720 --> 0:22:16.639 Or else you're playing along too much. You need to 0:22:16.640 --> 0:22:19.119 get a little bit more vigilante, don't you know? 0:22:19.920 --> 0:22:20.480 What can you do? 0:22:20.600 --> 0:22:24.399 By the way, in terms of, you know, pivoting your strategy, 0:22:24.480 --> 0:22:27.160 you can't. Can you go up in quality if. 0:22:27.040 --> 0:22:29.439 You're a co director of high Year, Sure, yeah, and 0:22:29.480 --> 0:22:31.679 we've been doing a fair amount of that, and I 0:22:31.680 --> 0:22:33.359 think then the other thing you do is you go 0:22:33.440 --> 0:22:36.359 into sectors where you have a greater degree of certainty. 0:22:36.640 --> 0:22:39.600 So you know, we look at affluent consumers are still spending. 0:22:39.840 --> 0:22:42.679 Cruise ship companies happen to be doing extremely well, and 0:22:42.760 --> 0:22:45.240 actually if you look at their bookings through twenty twenty four, 0:22:45.600 --> 0:22:49.320 they're solidly booked. You know, we've seen some softness in 0:22:49.320 --> 0:22:51.720 the airline space, but the cruise ships happen to be different. 0:22:52.040 --> 0:22:54.080 You know, even if you're looking at something like homebuilders, 0:22:54.119 --> 0:22:56.520 you would say to yourself, well, how could homebuilders be 0:22:56.600 --> 0:22:59.320 doing well in this kind of environment? Well, right now, 0:22:59.640 --> 0:23:03.600 you know, secondary or home sales have dried up because 0:23:03.640 --> 0:23:06.320 anyone that's got a three and a half percent mortgage 0:23:06.560 --> 0:23:08.760 or four percent mortgage, isn't going to sell their house 0:23:08.800 --> 0:23:11.879 and buy something new unless they absolutely have to because 0:23:11.880 --> 0:23:14.760 they're moving, for example, to a whole other state. So 0:23:15.040 --> 0:23:17.679 the only game in town right now is buying a 0:23:17.680 --> 0:23:20.440 new house. And the margins on the home building industry 0:23:20.440 --> 0:23:24.000 over the last several years have accelerated in a significant way, 0:23:24.240 --> 0:23:27.320 so they've got room to play around and offer extra 0:23:27.400 --> 0:23:30.520 financing support for the first two or three years. They 0:23:30.520 --> 0:23:33.760 can bring down the quality or going to put carpeting 0:23:33.760 --> 0:23:35.160 in instead of hardwood floors. 0:23:35.400 --> 0:23:37.679 They've got room to maneuver. But the homebuilders are actually 0:23:37.680 --> 0:23:38.399 doing quite well. 0:23:38.720 --> 0:23:42.000 How about the cable slash telecom space, big big issues 0:23:42.040 --> 0:23:44.920 in the high healed space historically. How about those you 0:23:44.920 --> 0:23:46.760 guys have exposure there and what do you like or 0:23:46.760 --> 0:23:47.160 don't we? 0:23:47.160 --> 0:23:47.480 We do? 0:23:47.600 --> 0:23:48.200 We do? 0:23:48.240 --> 0:23:48.439 You know? 0:23:48.520 --> 0:23:50.600 The cable sector. You know, if we look back. 0:23:50.440 --> 0:23:51.760 And you look at some of the names in the 0:23:51.800 --> 0:23:54.840 space on the equity side, over the last couple of years, 0:23:54.880 --> 0:23:56.800 they've been under pressure ye big time. And I think 0:23:56.840 --> 0:23:59.320 that that's reflecting a couple of things. And one is 0:23:59.359 --> 0:24:04.240 the competitiveness of wireless alternatives yep. 0:24:04.880 --> 0:24:05.720 And then there was. 0:24:05.760 --> 0:24:08.560 Cord cutting is obviously going on, but I think we've 0:24:08.600 --> 0:24:10.840 seen some changes in the last several months. 0:24:10.880 --> 0:24:12.720 They always pay their interest in principle, though. 0:24:12.800 --> 0:24:15.040 They are always paying their interest in principle, and I think, 0:24:15.080 --> 0:24:16.760 you know, think about how many of us are still 0:24:16.960 --> 0:24:19.800 working from home, at least part time, maybe not in 0:24:19.840 --> 0:24:22.359 the office every day of the week, and those people 0:24:22.560 --> 0:24:23.879 need that. 0:24:23.960 --> 0:24:28.119 Average office professional in Durham, North Carolina, what are they 0:24:28.119 --> 0:24:29.679 doing how many days a week back in the office. 0:24:29.680 --> 0:24:31.720 I'm going to say we're in at least three days 0:24:31.760 --> 0:24:33.920 a week, and I'm going to say that's what most 0:24:33.920 --> 0:24:34.600 people are doing. 0:24:34.720 --> 0:24:35.760 That's the new normal, man. 0:24:36.000 --> 0:24:38.240 Yeah, no, I know it's the real world. 0:24:38.240 --> 0:24:39.880 That's what the real people are doing. 0:24:40.840 --> 0:24:41.159 Well. 0:24:41.280 --> 0:24:44.639 I think bosses are trying to change that, but employees 0:24:44.680 --> 0:24:45.760 are fighting back. 0:24:45.960 --> 0:24:48.359 Yeah, we just need a good recession, all right, real quick, 0:24:48.359 --> 0:24:50.119 What do you expect from your Federal Reserve tomorrow? 0:24:51.440 --> 0:24:52.959 I think it's going to be a quiet day from 0:24:53.000 --> 0:24:53.359 the Fed. 0:24:53.440 --> 0:24:56.000 I think that there's you know, there's reasons why they 0:24:55.840 --> 0:24:58.399 may go the other way and raise rates, but I 0:24:58.760 --> 0:25:00.360 don't think that that's in the cards right now. 0:25:00.359 --> 0:25:02.600 I think we're in a holding pattern all right. 0:25:03.119 --> 0:25:07.040 Again, Looking at the then function of Bloomberg Index Browser, 0:25:07.480 --> 0:25:11.080 US mortgage backed securities, US aggregate, US government credit, US Treasury, 0:25:11.240 --> 0:25:15.800 US universal all down two three four percent year to date. 0:25:16.160 --> 0:25:19.480 The one exception, US corporate high Yield a positive four 0:25:19.520 --> 0:25:22.320 point three eight percent return. But as you mentioned, Ken, 0:25:22.359 --> 0:25:24.520 on the month, down one point four percent of all 0:25:24.520 --> 0:25:24.879 the bonds. 0:25:24.920 --> 0:25:27.320 If you look at JNK or HyG, they're not doing 0:25:27.320 --> 0:25:27.720 that great. 0:25:27.880 --> 0:25:30.640 Yeah, yeah, so interesting stuff there, but positive for the year, 0:25:30.840 --> 0:25:33.560 not positive for the year. And on Friday we'll talk 0:25:33.800 --> 0:25:36.320 with Joe Meisek talked about the immunis bond market. 0:25:36.440 --> 0:25:38.199 I'm very much looking forward up to that. 0:25:38.560 --> 0:25:40.679 Ken Monahan, thank you so much for joining us. Ken Monahan, 0:25:40.720 --> 0:25:43.000 co director of High Yield for a Mundi US based 0:25:43.040 --> 0:25:44.080 in Durham, North Carolina. 0:25:45.600 --> 0:25:48.960 You're listening to the team Ken's are Live program Bloomberg 0:25:49.080 --> 0:25:52.479 Markets weekdays at ten am Eastern on Bloomberg dot Com, 0:25:52.520 --> 0:25:55.640 the iHeartRadio app, and the Bloomberg Business App, or listen 0:25:55.720 --> 0:25:57.840 on demand wherever you get your podcasts. 0:26:00.040 --> 0:26:03.840 We're right smack in the middle of earnings, Marcus digesting 0:26:03.880 --> 0:26:06.480 them on a daily basis. Got some some more earnings 0:26:06.480 --> 0:26:08.879 after the close today AMD then of course Apple after 0:26:08.920 --> 0:26:11.119 the close, we want to go across the pond and 0:26:11.119 --> 0:26:14.600 see how things are over in Europe with earnings, with markets, 0:26:14.880 --> 0:26:17.240 where's the performance, where's the risk? And we do that 0:26:17.640 --> 0:26:19.840 with one Tim Craig at He is a director of 0:26:19.920 --> 0:26:23.879 research and he's also a senior European strategist for Bloomberg Intelligence, 0:26:23.960 --> 0:26:27.760 joining us from Queen Victoria Street, the global European global 0:26:27.760 --> 0:26:30.840 headquarters of Bloomberg and it is the smoking hot building, 0:26:30.960 --> 0:26:33.600 just crazy the building over there. Hey, Tim, thanks so 0:26:33.680 --> 0:26:36.119 much for joining us here, give us the headlines. Just 0:26:36.240 --> 0:26:39.000 step back thirty thousand feet for our listeners and viewers, 0:26:39.040 --> 0:26:41.160 or maybe aren't really up to date on how the 0:26:41.359 --> 0:26:43.160 European markets have been performing this year. 0:26:44.320 --> 0:26:48.480 Yeah, well, we have been behind the US from the 0:26:48.480 --> 0:26:51.879 standpoint of market performance. We don't have the big tech 0:26:51.960 --> 0:26:55.320 that's driven the S and P five hundred back up 0:26:55.440 --> 0:26:59.800 over the course of into autumn. That said, we also 0:27:00.200 --> 0:27:03.800 don't have the big tech that's been under pressure since 0:27:03.920 --> 0:27:08.200 the July August peaks. And so while the US has 0:27:08.240 --> 0:27:11.760 certainly taken a pumbling and we've sold off, we've not 0:27:11.840 --> 0:27:13.359 sold off as much. 0:27:14.080 --> 0:27:16.680 So that's sort of the quick synopsis. 0:27:17.680 --> 0:27:20.000 So we've taken a pumbling, you've sold off, but not 0:27:20.080 --> 0:27:20.560 as much. 0:27:21.080 --> 0:27:21.399 Today. 0:27:21.440 --> 0:27:26.360 We learn though that your third quarter showed a contraction 0:27:26.440 --> 0:27:28.280 in growth and we were growing five percent. 0:27:28.400 --> 0:27:30.880 Buddy, Hey, there you go. 0:27:31.359 --> 0:27:34.800 No, I mean, you know, obviously backward looking isn't what matters. 0:27:34.880 --> 0:27:37.680 And as Caterpillar I think proves today people really care 0:27:37.880 --> 0:27:38.720 about the outlook. 0:27:39.359 --> 0:27:40.639 As if we didn't know that already. 0:27:40.960 --> 0:27:44.280 How is the outlook for European earnings compared to US earnings? 0:27:45.119 --> 0:27:47.600 So, Matt, I think it's really interesting thinking about the 0:27:47.720 --> 0:27:50.720 ernience picture, you know, again, the compared and contrast. You know, 0:27:50.800 --> 0:27:53.760 the US went through a few quarters of Ernien's contraction 0:27:54.200 --> 0:27:57.080 while Europe was still gaining a lot of that. Ernians 0:27:57.119 --> 0:28:01.520 contraction in the US was big tech oriented, and what 0:28:01.640 --> 0:28:04.080 we're feeling now in Europe and we will see in 0:28:04.160 --> 0:28:08.880 earnings decline again this quarter, is actually a lagging impact 0:28:09.040 --> 0:28:11.920 of the decline that we've seen in things like energy 0:28:12.000 --> 0:28:15.800 and metals prices, which are really big over here, much 0:28:15.840 --> 0:28:19.120 more so than they are in US markets. The thing 0:28:19.200 --> 0:28:22.359 I don't think either market has necessarily felt is the 0:28:22.400 --> 0:28:25.840 full impact of the spike in interest rates that we've 0:28:25.840 --> 0:28:27.919 had and how that's going to have an impact on 0:28:27.960 --> 0:28:30.880 consumer and businesses as we go into twenty twenty four, 0:28:31.760 --> 0:28:35.120 which does play into an awful lot of the earnings 0:28:35.160 --> 0:28:40.600 commentary that we're hearing through the reporting period. Just to 0:28:40.640 --> 0:28:43.520 give you a couple of numbers, we're about halfway through 0:28:43.680 --> 0:28:47.160 here in Europe, a little behind where you are where 0:28:47.200 --> 0:28:47.920 you are. 0:28:47.680 --> 0:28:48.400 In the US. 0:28:49.360 --> 0:28:52.320 It sounds okay that we've got about fifty percent of 0:28:52.360 --> 0:28:55.920 the companies that have beat earnings expectations, about thirty five 0:28:56.040 --> 0:29:00.760 that have missed, But in fact that's the worst performance 0:29:01.080 --> 0:29:03.520 from the standpoint of beats versus misses that we've had 0:29:03.560 --> 0:29:06.320 since the pandemic low. So I would categorize this it's 0:29:06.320 --> 0:29:08.080 a pretty disappointing earning season. 0:29:08.960 --> 0:29:12.440 Hey, Tim, talk to us about valuation. Where are you 0:29:12.480 --> 0:29:16.120 guys over there in terms of valuation right now? 0:29:17.160 --> 0:29:20.800 Yeah, So you look at the broad European market where 0:29:20.920 --> 0:29:25.960 twelve and a half times forward earnings, it's down from 0:29:26.840 --> 0:29:33.040 a recent highs of thirteen ish, clearly far below where 0:29:33.080 --> 0:29:36.640 the US trades. You can find markets like the German 0:29:36.760 --> 0:29:41.200 Docks index that's retraced all the way to ten times 0:29:41.240 --> 0:29:45.080 forward earnings, and that's with a heavy dose of the 0:29:45.080 --> 0:29:49.800 big German auto companies that are facing increasing pricing competition 0:29:50.120 --> 0:29:54.120 and ev competition from China. So you know, it's clearly 0:29:54.520 --> 0:29:57.720 there's a value tilt from the standpoint of an absolute 0:29:57.840 --> 0:30:01.280 multiple across the European markets. But I would also say, 0:30:01.480 --> 0:30:03.960 and you know it's true from a US perspective as well, 0:30:04.440 --> 0:30:06.880 with interest rates being as high as they are, and 0:30:06.920 --> 0:30:11.800 they've certainly ratcheted up here market by market over the 0:30:11.800 --> 0:30:15.840 course of the autumn. You know, that does take a 0:30:15.920 --> 0:30:18.600 toll on what you're willing to pay in terms of 0:30:18.680 --> 0:30:23.440 market valuation. So what would seem cheap from an absolute 0:30:23.520 --> 0:30:29.160 level ten times twelve times a year ago now isn't 0:30:29.280 --> 0:30:32.120 quite so cheap on our fair value work because interest 0:30:32.160 --> 0:30:33.120 rates are simply higher. 0:30:34.000 --> 0:30:39.280 Yeah, I wonder how important China is to European earnings. 0:30:39.280 --> 0:30:43.480 And I know they haven't fully penetrated the entire continent, 0:30:43.520 --> 0:30:45.440 but when I was over there, you know, they had 0:30:45.440 --> 0:30:49.520 made their way up through Africa and straight to the 0:30:49.640 --> 0:30:54.440 tip of Italy. You know, is it a bigger driver 0:30:54.760 --> 0:30:59.000 of well, let's say, revenue growth China than it is 0:30:59.040 --> 0:31:01.840 for US companies significantly? 0:31:01.880 --> 0:31:05.760 So the recent analysis we did looking at the stock 0:31:05.800 --> 0:31:11.760 six hundred eighty of the six hundred have got overtly 0:31:13.160 --> 0:31:18.200 easy to define significant contribution. If you add it up, 0:31:18.240 --> 0:31:22.640 it's about four hundred and fifty billion in revenue. These 0:31:22.680 --> 0:31:26.360 companies aggregate to be about thirty percent of the European 0:31:26.440 --> 0:31:28.960 market in terms of index weight, So any way you 0:31:29.000 --> 0:31:30.680 want to cut it, there's a lot of companies. 0:31:30.720 --> 0:31:32.960 They're big companies, and it's a lot of revenue. 0:31:33.640 --> 0:31:36.360 And what we're seeing in the third quarter maybe no 0:31:36.520 --> 0:31:41.959 surprise given the faltering, stuttering economic growth in China is 0:31:42.920 --> 0:31:47.200 that business is also faltering a bit. They already mentioned 0:31:47.200 --> 0:31:50.920 the German autos as a case in point. Contrast that 0:31:50.920 --> 0:31:54.040 with Stillantis today, which doesn't have so much China exposure 0:31:54.040 --> 0:31:56.200 but more US exposure, and it was a little bit better. 0:31:57.520 --> 0:32:04.360 The luxury good companies have talked about weakening China economic activity, 0:32:04.840 --> 0:32:09.800 and there are several others that are showing that they're 0:32:09.880 --> 0:32:13.720 signs of weakness. Now two things other to mention on China, 0:32:14.320 --> 0:32:17.800 this was still an easy comparison for three Q. Remember 0:32:17.840 --> 0:32:22.280 they didn't open back up until October and November last year, 0:32:22.560 --> 0:32:26.320 so it's really the fourth quarter that is going to 0:32:26.320 --> 0:32:28.000 be a more difficult comparison. 0:32:28.040 --> 0:32:29.720 And on into the first quarter. 0:32:29.760 --> 0:32:33.040 Of next year, So if things are still stuttering, that 0:32:33.080 --> 0:32:36.200 business is going to be more of a challenge. And 0:32:36.240 --> 0:32:39.880 the other thing, obviously, thinking about twenty twenty four, the 0:32:39.880 --> 0:32:42.240 more pressure there is on the economy, the more likely 0:32:43.160 --> 0:32:46.280 there's going to be fiscal and monetary measures to stimulate 0:32:46.320 --> 0:32:48.440 the economy, which might all of a sudden turn this 0:32:48.560 --> 0:32:50.680 around as we look into the back half of next year, 0:32:50.800 --> 0:32:53.840 and clearly the markets will discount that. Right now, everybody's 0:32:53.840 --> 0:32:56.680 focused on current weakness that may be short lived. 0:32:56.960 --> 0:32:59.800 Hey, Tim, you travel all around the continent, all around 0:32:59.800 --> 0:33:02.800 your speaking to institutional investors. What did they want to know? 0:33:02.920 --> 0:33:05.720 I mean, what's kind of the common question, top question 0:33:05.760 --> 0:33:06.320 you get asked? 0:33:07.360 --> 0:33:10.600 Yeah, you know, Paul, I guess a couple things come 0:33:10.680 --> 0:33:12.920 to mind. It was just in an event last week 0:33:13.000 --> 0:33:17.520 in Frankfurt, And at this point it really is all 0:33:17.560 --> 0:33:22.800 about the macro outlook and what's going on with monetary policy, 0:33:22.880 --> 0:33:25.640 When is the pivot going to happen, and how much 0:33:25.680 --> 0:33:30.240 of that pivot does then translate into a reduction in 0:33:30.320 --> 0:33:34.000 things like ten year yields because it's not an immediate 0:33:34.040 --> 0:33:37.680 feed through, but that's that's crucial because the higher we are, 0:33:37.840 --> 0:33:40.040 the longer we are on interest rates, the more of 0:33:40.080 --> 0:33:43.280 an impact there is on business and consumer and you 0:33:43.320 --> 0:33:46.640 know that's a huge pressure point for the twenty twenty 0:33:46.640 --> 0:33:47.240 four outlook. 0:33:47.960 --> 0:33:52.600 All right in suburban London near your pad? What's a 0:33:52.640 --> 0:33:54.160 good pint going to cost me? 0:33:55.080 --> 0:33:58.280 A good pint when I go for Halloween today? Paul, 0:33:58.680 --> 0:33:59.480 there we go? 0:34:00.040 --> 0:34:00.320 Thank you? 0:34:01.880 --> 0:34:04.720 Is gonna be about seven pounds for a pint? 0:34:05.160 --> 0:34:05.640 Wow? 0:34:05.960 --> 0:34:06.719 Seven pounds? 0:34:06.720 --> 0:34:10.120 And do you do you do like Guinness extra cold 0:34:10.200 --> 0:34:12.840 or do you have them pull you an actual ale 0:34:13.040 --> 0:34:14.680 from one of those old school taps? 0:34:14.840 --> 0:34:15.200 Oh? 0:34:15.400 --> 0:34:21.239 I like I like the cast ales definitely. See which delicious? 0:34:21.360 --> 0:34:23.960 Best best thing is a Trappist dale though from from 0:34:23.960 --> 0:34:26.120 Belgium that that's the best beer, that's. 0:34:26.000 --> 0:34:26.520 The best beer. 0:34:26.600 --> 0:34:27.000 Hey are you? 0:34:27.040 --> 0:34:29.600 Are you still avoiding the congestion tax in London by 0:34:29.840 --> 0:34:31.320 riding your bike to the office? 0:34:32.040 --> 0:34:32.799 I do. 0:34:32.840 --> 0:34:35.240 I rode this morning. See he's one of those people 0:34:35.239 --> 0:34:37.080 that I'll write, I'll ride home this afternoon. 0:34:37.160 --> 0:34:38.160 See that's smart. 0:34:38.200 --> 0:34:40.279 I'm gonna avoid the congestion charge in New York by 0:34:40.280 --> 0:34:41.440 getting a garage. 0:34:41.040 --> 0:34:42.000 On sixtieth Street. 0:34:42.080 --> 0:34:43.440 Yeah, we're gonna get John Tuckerolle bike. 0:34:43.480 --> 0:34:46.600 Yeah, I'm going to ride my bike in the morning. 0:34:47.840 --> 0:34:50.280 The Lincoln Tunnel in the morning. 0:34:50.320 --> 0:34:52.319 I don't think they allow bikes in Lincoln. 0:34:52.000 --> 0:34:53.640 All right, Tim, thanks so much for joining us, as 0:34:53.640 --> 0:34:55.920 I always appreciated. Tim Craig Eddy is the director of 0:34:56.000 --> 0:34:58.640 research over there in London, uh and he's a senior 0:34:58.680 --> 0:35:02.960 European strategist for Bloomberg Intelligence. Ton tons of experience in 0:35:03.000 --> 0:35:05.960 the equity markets. Morgan Stanley did a little hedge fund work, 0:35:05.960 --> 0:35:08.000 and then we nab them at Bloomberg Intelligence back in 0:35:08.040 --> 0:35:08.359 the day. 0:35:08.680 --> 0:35:11.200 You're listening to the tape. Cat's a our live program, 0:35:11.239 --> 0:35:15.200 Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio, 0:35:15.360 --> 0:35:18.040 the tune in app, Bloomberg dot Com, and the Bloomberg 0:35:18.120 --> 0:35:21.240 Business App. You can also listen live on Amazon Alexa 0:35:21.280 --> 0:35:24.560 from our flagship New York station. Just say Alexa play 0:35:24.680 --> 0:35:26.680 Bloomberg eleven thirty. 0:35:27.840 --> 0:35:29.680 Let's take a look at these markets. Where do we 0:35:29.719 --> 0:35:32.360 go from here? With Rightsmack in the middle of earnings, 0:35:33.120 --> 0:35:36.520 people starting to think about next year, where to be positioned. 0:35:36.760 --> 0:35:39.040 Our next guest thinks about that stuff as well. Lucas 0:35:39.040 --> 0:35:44.239 to Mickey. He's a founder managing partner of LRT Capital Management. Lucas, 0:35:44.239 --> 0:35:46.560 thanks so much. For joining us here, give us just 0:35:46.640 --> 0:35:48.560 let's start off by just getting a sense of how 0:35:48.640 --> 0:35:52.200 you guys deploy capital LRT capital management kind of what's 0:35:52.200 --> 0:35:54.200 your strategy that you guys deploy. 0:35:55.560 --> 0:35:56.920 Hey, Matt, thanks for having me. 0:35:57.480 --> 0:35:59.480 Yeah, to give you a quick overview. 0:36:00.080 --> 0:36:03.600 Are really trying to focus on business quality and business resilience. 0:36:04.040 --> 0:36:06.520 So to us, quality means free things. 0:36:06.560 --> 0:36:07.359 It means some. 0:36:07.320 --> 0:36:11.120 Kind of durable competitive advantage. It means the ability to 0:36:11.160 --> 0:36:14.920 grow and reinvest capital at high incremental rates of return, 0:36:15.560 --> 0:36:18.400 and it means management teams that have demonstrated a good, 0:36:18.680 --> 0:36:22.280 good track record of allocating shareholder capital. 0:36:23.320 --> 0:36:25.480 All right, So looking at all those variables, what do 0:36:25.480 --> 0:36:25.799 you like? 0:36:27.280 --> 0:36:30.080 Well, I think you know, from a macro perspective, we're 0:36:30.200 --> 0:36:33.399 likely heading towards an economic slow down, if not an 0:36:33.440 --> 0:36:37.520 outright recession. And so today, you know, the theme for 0:36:37.560 --> 0:36:40.680 me is really investing in resilient companies. So the free 0:36:40.680 --> 0:36:45.400 companies that we like most today are Chemed, which is 0:36:45.440 --> 0:36:48.879 kind of an odd business. They own two businesses within it. 0:36:49.320 --> 0:36:51.880 We also love Elevans and trying it. 0:36:53.040 --> 0:36:55.680 All right, let's start with Kem here, tell me the 0:36:55.920 --> 0:36:58.759 kind of what business they're in. I'm looking at the 0:36:58.800 --> 0:37:01.399 stock here. It's it is an eight and a half 0:37:01.400 --> 0:37:04.439 billion dollar market cap company. Stock stocks up about ten 0:37:04.480 --> 0:37:06.879 percent year today. So tell us about the call there. 0:37:06.880 --> 0:37:08.719 What do they do and what's the investment call? 0:37:09.520 --> 0:37:12.200 Yeah, so Chaman is a very odd company in that 0:37:12.280 --> 0:37:16.000 they own two businesses that are completely unrelated to each other. 0:37:16.320 --> 0:37:20.000 They own Vitas, which is a hospice care provider, and 0:37:20.320 --> 0:37:25.000 Roto Router, which is a commercial and plumbing service. Yeah, 0:37:25.040 --> 0:37:29.040 I don't see the connection, but go on, No, there's 0:37:29.080 --> 0:37:31.839 no connection on the surface, but the real connection is 0:37:31.880 --> 0:37:36.400 that these are very resilient businesses from macroeconomic perspective. So 0:37:36.520 --> 0:37:41.279 Vitas or Vitas provides end of life care effectively, and 0:37:41.560 --> 0:37:45.040 Medicare of course is the largest customer. And so for 0:37:45.120 --> 0:37:48.760 most people, you know, the statistics say you're spending somewhere 0:37:48.760 --> 0:37:53.200 between twenty five to thirty percent of your entire life's 0:37:53.560 --> 0:37:57.600 healthcare cost just in the last few months. You know, 0:37:57.600 --> 0:38:01.080 when you're effectively dying in the hospital, get very expensive care, 0:38:01.200 --> 0:38:05.880 very expensive treatment, and that's a very big cost for Medicare. 0:38:06.320 --> 0:38:11.160 And frankly, you know, not everyone sees the benefits of that. 0:38:11.280 --> 0:38:15.160 So many people opt for hospice care, which is effectively 0:38:15.200 --> 0:38:19.960 palliative care where you end treatment and you're just receiving 0:38:20.120 --> 0:38:23.440 medication to manage pain and you know, improve your comfort 0:38:23.520 --> 0:38:26.840 of life. And obviously that saves costs, and frankly, you 0:38:26.880 --> 0:38:28.399 know a lot of people see that as a more 0:38:28.760 --> 0:38:30.440 dignified way to go. 0:38:31.040 --> 0:38:33.840 And you know, just just looking at this, Lucas, you 0:38:33.920 --> 0:38:36.719 just don't see many corporate structures like this anymore, just 0:38:36.760 --> 0:38:39.640 pure holding companies, particularly the ones that that own just 0:38:39.800 --> 0:38:42.560 two businesses. What kind of attracted you to the company? 0:38:43.360 --> 0:38:45.360 Well, I followed it for a long time, and I 0:38:45.360 --> 0:38:48.920 don't think I'm the only one. But what frankly attracted 0:38:48.920 --> 0:38:52.000 me to their company is up until a few years ago, 0:38:52.400 --> 0:38:55.840 their website looked like it was straight from the nineteen nineties. 0:38:55.960 --> 0:38:59.719 And that might sound counterintuitive, but that that was to 0:38:59.719 --> 0:39:02.440 me very odd signal that this is a company that's 0:39:02.440 --> 0:39:06.839 really focused on business operations and not promoting things. And 0:39:06.880 --> 0:39:10.600 so generally speaking, we like non promotional, you know, down 0:39:10.640 --> 0:39:12.560 to earth kind of management teams. 0:39:12.840 --> 0:39:16.520 And it's up, yeah, eighty seven percent over the past 0:39:17.160 --> 0:39:19.399 five years, of ten percent this year, eighty seven percent 0:39:19.480 --> 0:39:21.040 of the past five years total return. 0:39:21.360 --> 0:39:21.960 It's done well. 0:39:22.400 --> 0:39:25.560 The roto Router business also you know, these are two 0:39:25.560 --> 0:39:29.799 businesses that people are never going to not need. If 0:39:29.800 --> 0:39:32.040 I can split my infinitive just to make the point, 0:39:32.600 --> 0:39:36.120 and I get that, do they spin off at some point. 0:39:35.840 --> 0:39:36.799 One or the other? 0:39:36.960 --> 0:39:38.200 Do they break into two? 0:39:38.280 --> 0:39:38.759 Do you think? 0:39:39.960 --> 0:39:42.960 I think that's long been a theme and the thinking, 0:39:43.960 --> 0:39:46.520 I frankly don't have a problem with the business the 0:39:46.560 --> 0:39:51.040 way it is. They have opportunities to deploy capital, primarily 0:39:51.200 --> 0:39:56.160 in the roto router business by buying out franchisees from 0:39:56.200 --> 0:39:59.080 some of their territories, and then they have opportunities to 0:39:59.120 --> 0:40:02.080 buy back stock and the shares you know, are trading down, 0:40:02.680 --> 0:40:05.000 and as you mentioned, the stock is up a little 0:40:05.000 --> 0:40:08.960 bit this year, but that's largely happened last week on 0:40:08.960 --> 0:40:12.120 the back of good earnings. So you know, you're gonna 0:40:12.160 --> 0:40:15.520 have ups and downs, but it's a very resilient business. 0:40:15.600 --> 0:40:18.480 They've grown about four percent per year in terms of revenue, 0:40:18.800 --> 0:40:21.560 but they managed to translate that into a fourteen percent 0:40:21.640 --> 0:40:24.719 EPs growth over the same you know, last ten years 0:40:24.760 --> 0:40:24.920 or so. 0:40:25.360 --> 0:40:30.040 All right, how about E l V. Elevans Health another 0:40:30.080 --> 0:40:30.680 healthcare name. 0:40:31.360 --> 0:40:34.280 Yeah, so this is Elevants. This is the former Anthem 0:40:34.320 --> 0:40:38.239 insurance business. You know, so you may have sort of them. 0:40:38.280 --> 0:40:43.160 They rebranded themselves. We love the industry, broadly speaking, the 0:40:43.160 --> 0:40:47.440 health insurance industry. It's a very consolidated business. There's five 0:40:47.520 --> 0:40:50.440 players that command the majority of the market, a couple 0:40:50.480 --> 0:40:54.600 of smaller ones. And you know this is this company 0:40:54.640 --> 0:40:57.279 is called a health insurance company, but that's really a misnomer. 0:40:57.920 --> 0:41:01.560 Only about ten percent of what they do is tied 0:41:01.800 --> 0:41:07.440 to carrying risk. The majority of their business is managed 0:41:07.520 --> 0:41:13.480 care for the government, manage Medicare, Medicaid, and corporate accounts 0:41:13.680 --> 0:41:18.560 in which companies self insure, and so there's very little 0:41:18.560 --> 0:41:22.920 insurance risk in this space. It's really a health administrator, 0:41:22.960 --> 0:41:26.880 if you will. And it's so regulated that they're frankly 0:41:26.920 --> 0:41:29.440 not allowed to even you know, the amount of profit 0:41:29.480 --> 0:41:33.000 they're allowed to make is regulated as well. And you 0:41:33.080 --> 0:41:37.200 see that between all the companies there's very limited competition. 0:41:37.520 --> 0:41:41.560 And call it GDP plus growth largely tied to the 0:41:41.600 --> 0:41:42.600 growth and healthcare costs. 0:41:42.840 --> 0:41:45.480 Yeah, we get that one. Let's get to t neet 0:41:46.120 --> 0:41:50.800 try net. It's also kind of an employee benefits company, right. 0:41:51.520 --> 0:41:53.040 Yeah, so this is slightly different. 0:41:53.160 --> 0:41:57.000 It's a very small company, about a five billion market cap. 0:41:57.520 --> 0:42:01.520 So this is a company that serves and medium sized 0:42:01.520 --> 0:42:05.480 businesses that are looking to get employee benefits. And employee 0:42:05.480 --> 0:42:11.080 benefits may mean many things, primarily HR health insurance. 0:42:10.520 --> 0:42:11.879 Disability insurance, etc. 0:42:12.840 --> 0:42:16.280 But in practice ninety percent of what drives their business 0:42:16.520 --> 0:42:19.680 is health insurance. So what they do is they effectively 0:42:19.719 --> 0:42:24.200 get a bunch of small employee or employers with small 0:42:24.239 --> 0:42:27.960 employee numbers. They get them together and using their bulk 0:42:28.040 --> 0:42:32.520 purchasing power, acquire health insurance at better rates, pass the 0:42:32.560 --> 0:42:36.600 savings onto their customers, and keep, of course a small 0:42:36.640 --> 0:42:38.520 part of those savings for themselves. 0:42:39.000 --> 0:42:42.440 Hey, Lucas, thanks so much for joining us. Appreciate listening 0:42:42.520 --> 0:42:44.279 to some of your thoughts there on the stocks that 0:42:44.320 --> 0:42:47.640 you guys own. Some pretty interesting names, some good performers. 0:42:47.719 --> 0:42:51.480 Lucas Tomickey. He's a founder and managing partner of LRT 0:42:52.000 --> 0:42:55.640 Capital Management. One of those folks is putting money to work. Who, 0:42:55.719 --> 0:42:58.480 as Tom Keen would say, has the courage to be 0:42:58.680 --> 0:43:02.480 in the market. SMP five hundred pretty much unchanged on 0:43:02.760 --> 0:43:05.600 the day nasdak off about three tenths of one percent, 0:43:05.640 --> 0:43:08.640 but at the index level, not a lot happening there, 0:43:08.719 --> 0:43:12.279 of course, a lot of movement under the surface there's 0:43:12.280 --> 0:43:15.239 company's report earnings for the next week or so. In 0:43:15.320 --> 0:43:16.360 size you're. 0:43:16.200 --> 0:43:19.560 Listening to the tape Cat's are live program Bloomberg Markets 0:43:19.640 --> 0:43:23.000 weekdays at ten am Eastern on Bloomberg Radio, the tune 0:43:23.080 --> 0:43:26.040 in app, Bloomberg dot Com, and the Bloomberg Business App. 0:43:26.080 --> 0:43:28.879 You can also listen live on Amazon Alexa from our 0:43:28.880 --> 0:43:33.960 flagship New York station, Just say Alexa play Bloomberg eleven thirty. 0:43:35.200 --> 0:43:38.880 Claudi Assam is the founder of Some Consulting. She is 0:43:38.880 --> 0:43:41.879 obviously a former Federal Reserve economist. We'd love to talk 0:43:41.920 --> 0:43:44.840 to her both here and on Bloomberg Surveillance. She is 0:43:44.920 --> 0:43:47.480 also the creator of the Sam Rule, which is a 0:43:47.480 --> 0:43:52.480 recession indicator, and a Dennison University graduate. 0:43:52.600 --> 0:43:54.000 So the Dutches, you guys, are the fight. 0:43:54.080 --> 0:43:57.160 I'm from Grandville, Ohio, so you know, for me, that's 0:43:57.360 --> 0:43:59.280 a big deal, and it's a Dennison fighting. 0:43:59.440 --> 0:44:01.200 They're the big read I think they read all. 0:44:02.200 --> 0:44:05.160 It's not really a sports thing, but more. 0:44:05.040 --> 0:44:06.080 Of a fun school. 0:44:06.200 --> 0:44:08.359 It was a fun school then it became a very 0:44:08.400 --> 0:44:12.120 serious school in the nineties when I was living there, 0:44:12.200 --> 0:44:12.920 although I did. 0:44:12.760 --> 0:44:14.520 See fish there which was pretty awesome. 0:44:14.800 --> 0:44:18.080 Claudia joins us to talk about the economy obviously, and 0:44:18.120 --> 0:44:21.720 not her college experience. And you also wear a column 0:44:21.800 --> 0:44:27.360 Claudia about Americans basically, you know, trying to answer the 0:44:27.440 --> 0:44:29.600 question that we're asking every day, which is why are 0:44:29.600 --> 0:44:32.560 the numbers so good? And Americans feel like the economy 0:44:32.600 --> 0:44:36.200 is so bad? You know, five percent GDP and yet 0:44:36.280 --> 0:44:38.799 everyone says a recessions around the corner, how's that going 0:44:38.880 --> 0:44:39.240 to happen? 0:44:40.960 --> 0:44:41.120 Right? 0:44:41.200 --> 0:44:43.600 And to be clear, there's a lot of reasons to 0:44:43.760 --> 0:44:47.360 be gloomy. Inflation is high, there's a lot of uncertainty. 0:44:48.239 --> 0:44:52.560 The question is why are the extra gloominess right? And 0:44:52.960 --> 0:44:55.200 things are as you said, there are a lot of 0:44:55.239 --> 0:44:58.400 good things. Unemployment is low, it's been low for almost 0:44:58.400 --> 0:45:01.920 two years, under four percent, Like that's really good. And 0:45:01.960 --> 0:45:05.160 if you ask people how's it going? What kind of 0:45:05.200 --> 0:45:08.040 news have you heard about? The economy is as bleak 0:45:08.080 --> 0:45:10.279 as when you go back to the nineteen seventies and 0:45:10.320 --> 0:45:13.960 early eighties. Right, it's very hard to say, oh, that 0:45:14.080 --> 0:45:17.120 totally makes sense. There's these bad things happening in the economy. 0:45:17.239 --> 0:45:20.080 Is that extra kick? And frankly, that's the piece we 0:45:20.120 --> 0:45:22.880 want to understand because it could really be telling us 0:45:22.880 --> 0:45:26.480 something bad is around the corner. People have been doing 0:45:26.520 --> 0:45:28.480 that for two years and then it's like, Okay, what 0:45:28.560 --> 0:45:29.759 else is going on here? 0:45:30.280 --> 0:45:33.759 Well, we can't underplay the importance of inflation to a 0:45:33.840 --> 0:45:39.080 normal American who is living paycheck to paycheck anyway. You know, 0:45:39.120 --> 0:45:42.759 economists love to look at core inflation measures, which take 0:45:42.800 --> 0:45:45.880 out all the stuff that we spend our paycheck on. 0:45:46.040 --> 0:45:50.840 Right food is expensive right now, cars are incredibly expensive. 0:45:50.840 --> 0:45:52.640 Plus financing has climbed. 0:45:52.719 --> 0:45:54.920 Houses are even not even you don't want to talk 0:45:54.920 --> 0:45:57.600 about because that's not even affordable if you can find one. 0:45:57.719 --> 0:46:01.120 So is that the main price problem that Americans have. 0:46:03.440 --> 0:46:06.840 Inflation has always been something that people would get riled up, 0:46:06.880 --> 0:46:09.920 but rightly so right and the price tags are legitimately 0:46:10.000 --> 0:46:12.799 higher and they're not coming down. What we've seen this 0:46:12.880 --> 0:46:16.239 year is it's slowing down. Inflation is coming down. That 0:46:16.520 --> 0:46:19.759 is a form of relief and that it could have 0:46:19.960 --> 0:46:24.000 been a lot worse. And there's lots of different pieces 0:46:24.040 --> 0:46:26.719 of good news that don't come up. We found out 0:46:26.800 --> 0:46:29.720 last week that household net worths for the typical family 0:46:30.360 --> 0:46:34.200 jump thirty seven percent pre pandemic to last year, and 0:46:34.239 --> 0:46:37.680 that was across income groups, demographic groups. You just saw 0:46:37.719 --> 0:46:42.760 these big increases, and that matters. Living paycheck to paycheck 0:46:42.800 --> 0:46:45.320 has been a problem in the US economy for decades. 0:46:46.040 --> 0:46:48.560 Many people have bigger paychecks, and there's a lot of 0:46:48.600 --> 0:46:50.960 people who have a little bit of a buffer that 0:46:51.080 --> 0:46:55.879 have never had it. So it's tough to see all 0:46:55.920 --> 0:46:59.920 those pieces come together and then have this absolutely bleak 0:47:00.080 --> 0:47:01.880 outlook for the economy. 0:47:01.920 --> 0:47:06.680 Well, Claudia, how much of it is the income inequality? 0:47:06.840 --> 0:47:09.959 Wealth inequality in this country where you know, the top 0:47:10.080 --> 0:47:13.600 ten percent are doing fine, actually better than fine, but 0:47:13.640 --> 0:47:16.960 the rest are really struggling with inflation, you know that 0:47:17.080 --> 0:47:20.759 that type of thing. How much is that to kind 0:47:20.760 --> 0:47:21.759 of account for it? 0:47:23.680 --> 0:47:28.440 This is the rarest of post recession periods in that 0:47:28.520 --> 0:47:33.239 we've seen often the bottom do better than they have 0:47:33.400 --> 0:47:36.120 coming out of any recession. I mean, the top's always 0:47:36.120 --> 0:47:38.839 going to be fine, right, Wealth inequality. Income inequality has 0:47:38.880 --> 0:47:41.600 been a problem in the United States for decades and decades. 0:47:41.760 --> 0:47:45.399 We actually saw some compression of that inequality, so it's 0:47:45.400 --> 0:47:48.480 shrinking some. I mean you can't hardly see it on 0:47:48.520 --> 0:47:50.960 the graph, right, it's it's you know, it's still big, 0:47:51.840 --> 0:47:55.080 So that inequality is out there. People tend to focus 0:47:55.120 --> 0:47:58.239 on what's in front of them, like what they need 0:47:58.280 --> 0:48:00.960 to do to put food on the table, roof over 0:48:01.000 --> 0:48:04.279 their head, and there are some service If you ask 0:48:04.280 --> 0:48:08.319 people about their own finances, they're more upbeat than when 0:48:08.360 --> 0:48:11.399 they look out at the economy. And so that's why 0:48:11.440 --> 0:48:14.640 in my I've written two pieces now at Bloomberg about 0:48:14.640 --> 0:48:18.560 this extra pessimism, trying to explore what it could be, 0:48:18.640 --> 0:48:21.680 and often it points to things that go beyond the economy, 0:48:22.760 --> 0:48:26.560 because we're asking people big picture about their outlook and 0:48:26.880 --> 0:48:30.400 there are other factors at play. We went through COVID 0:48:30.640 --> 0:48:32.960 and the war in Ukraine is ongoing. We've had so 0:48:33.120 --> 0:48:36.520 much bad news since the pandemic began, and then we 0:48:36.600 --> 0:48:40.160 do have features of how we transmit that bad news 0:48:40.560 --> 0:48:44.560 out into the public, and that's something that's different than 0:48:44.600 --> 0:48:45.600 the nineteen seventies. 0:48:45.680 --> 0:48:48.319 Yes, social media is what you're I assume what you're 0:48:48.320 --> 0:48:52.760 talking about here, and I think we all know now 0:48:53.120 --> 0:48:57.759 that the way for Elon Musk and Mark Zuckerberg to 0:48:57.760 --> 0:49:02.080 make money is for people to get angry and hateful 0:49:02.200 --> 0:49:06.360 on social media. That drives engagement and at the end 0:49:06.360 --> 0:49:08.200 of the day, the bottom line. So it kind of 0:49:08.280 --> 0:49:11.040 amplifies everything that's bad doesn't. 0:49:10.800 --> 0:49:14.040 It right, And we've always had the case that bad 0:49:14.040 --> 0:49:16.880 defense happen. The news comes out, it has a bias 0:49:16.920 --> 0:49:20.640 towards the bad. There's research news organizations, right, it's more 0:49:20.680 --> 0:49:24.240 negative that leads, it leads, right, So this is not new. 0:49:24.680 --> 0:49:28.080 But what happens is once it gets on platforms, social 0:49:28.120 --> 0:49:32.440 media platforms, it can spread far and wide and really fast. 0:49:32.920 --> 0:49:36.279 So it makes this bad news very personal because it 0:49:36.320 --> 0:49:39.640 can be conveyed by real people and not necessarily you know, 0:49:39.719 --> 0:49:44.040 print media or you know, on the TV. And it 0:49:44.120 --> 0:49:47.920 absolutely is the case that not only does negative spread faster, 0:49:48.880 --> 0:49:51.360 it gets absorbed fast. Like we're just there's a human 0:49:51.440 --> 0:49:54.120 tendency towards the negative. So it's like you put these 0:49:54.120 --> 0:49:58.000 three factors together, really bad events. News has a bias 0:49:58.000 --> 0:50:01.040 towards the negative. People love the negative, and then we 0:50:01.120 --> 0:50:04.960 can spread it really fast. So that's one way to 0:50:05.080 --> 0:50:08.800 think about it that you could get this extra kick. 0:50:09.400 --> 0:50:11.760 But absolutely we talked about a lot of economic factors 0:50:11.760 --> 0:50:14.080 that may not be captured and maybe different in the 0:50:14.120 --> 0:50:16.879 past that could be in there too. So it's really 0:50:16.960 --> 0:50:19.680 important to kind of pull this apart and figure out 0:50:19.960 --> 0:50:22.919 what's going on, because if people are really down beat, 0:50:22.960 --> 0:50:26.279 it can create a self fulfilling prophecy in that they 0:50:26.320 --> 0:50:28.720 pull back and they get more downbeat, and then before 0:50:28.760 --> 0:50:30.840 we know it, we're in a recession. So, like, this 0:50:30.960 --> 0:50:35.000 is an important question. People could be right. I mean, 0:50:35.040 --> 0:50:38.000 we could really be in a bad place in the 0:50:38.040 --> 0:50:38.839 next year or two. 0:50:39.440 --> 0:50:41.560 Well, and a lot of times when we get into 0:50:41.600 --> 0:50:46.120 a bad place, our leaders will hopefully come together and 0:50:46.440 --> 0:50:48.759 pull us out of it. And currently doesn't look like 0:50:48.800 --> 0:50:53.359 that's a possibility in this climate in Washington, with you know, 0:50:53.480 --> 0:50:59.480 the the lack of any kind of bipartisan In fact, 0:50:59.760 --> 0:51:01.480 you'll be thrown out a speaker of the House if 0:51:01.480 --> 0:51:03.200 you reach across the aisle. 0:51:02.920 --> 0:51:03.640 To make a deal. 0:51:03.840 --> 0:51:09.520 And deficits continue to climb. Now the latest, uh, the 0:51:09.600 --> 0:51:13.680 latest look is about two trillion dollars. Does that affect 0:51:13.800 --> 0:51:16.080 people's outlook? I mean they say that, you say they're 0:51:16.080 --> 0:51:18.720 doing well at home, but they're gloomy about the economy. 0:51:18.760 --> 0:51:21.720 Could it be because they see, you know, the USA 0:51:21.880 --> 0:51:23.760 government train kind of running off the tracks. 0:51:25.520 --> 0:51:27.799 They're in some of these sentiment surveys they ask people 0:51:27.840 --> 0:51:31.719 about government economic policy. It probably doesn't surprise anyone that 0:51:31.840 --> 0:51:34.840 the government scores pretty low and has for some time 0:51:35.239 --> 0:51:38.319 it's not clear to me that that's changed dramatically. You 0:51:38.360 --> 0:51:40.360 see it do move in like debt ceiling moments and 0:51:40.400 --> 0:51:44.399 the path like where people get more negative. It's more 0:51:44.440 --> 0:51:48.120 of that reality, like what happens if we were to 0:51:48.160 --> 0:51:51.960 go into a recession. Typically there's this saying we're all 0:51:52.040 --> 0:51:55.359 Knesians in a fox hole. So the money would go out, 0:51:55.440 --> 0:51:58.759 like the stimulus checks have gone out. But what's what 0:51:58.800 --> 0:52:01.840 would be problem is if it were a severe recession 0:52:01.880 --> 0:52:04.640 I mean we will hopefully never see anything like COVID again, 0:52:05.120 --> 0:52:07.759 is that it wouldn't last real long, and that ends 0:52:07.840 --> 0:52:11.560 up hurting people at the bottom the most right because 0:52:11.600 --> 0:52:16.440 they probably aren't recovered right away. So a government that 0:52:16.560 --> 0:52:23.080 doesn't have it all together will cause problems for people. 0:52:23.800 --> 0:52:25.879 Real people are going to suffer in the case of 0:52:26.000 --> 0:52:27.120 an economy going down. 0:52:28.040 --> 0:52:30.600 So where are you right now, Claude with with your 0:52:30.680 --> 0:52:33.560 economic outlook? 0:52:34.520 --> 0:52:38.040 It's tough. I wrote some on my substack last week, 0:52:38.080 --> 0:52:40.239 you know, really like we got to celebrate the winds here. 0:52:40.280 --> 0:52:43.759 We've saen inflation come down pretty notably, whether you're looking 0:52:43.800 --> 0:52:44.440 at core or. 0:52:46.000 --> 0:52:46.239 Yeah. 0:52:46.280 --> 0:52:48.399 I mean I tried to like, hey, there's some good 0:52:48.440 --> 0:52:51.800 stuff out here. Knowing that this wasn't going to amplify 0:52:51.840 --> 0:52:55.200 through social media. It's kind of hopeless. But there are 0:52:55.440 --> 0:52:59.960 plenty of dark clouds on the horizon. Interest rates are 0:53:00.239 --> 0:53:02.200 they've gone up a lot, and you are starting to 0:53:02.239 --> 0:53:06.239 see it. And when you ask businesses with their investment 0:53:06.360 --> 0:53:11.360 plans in some of the consumer credit quality measures, like 0:53:11.400 --> 0:53:15.600 the delinquencies they fell during after the pandemic, because again, 0:53:15.640 --> 0:53:19.640 we gave people so much relief, they're moving up and 0:53:20.120 --> 0:53:22.719 we could be moving back to quote unquote normal or 0:53:22.840 --> 0:53:25.160 there's just a certain level or this could be a 0:53:25.200 --> 0:53:27.839 sign that it's getting like people are in a more 0:53:27.960 --> 0:53:31.280 precarious place. And yet, like we've been kind of saying 0:53:31.320 --> 0:53:34.239 that at different times over the last two years. Right, 0:53:34.239 --> 0:53:38.000 the recession is always coming and it will someday, Like 0:53:38.040 --> 0:53:41.719 we don't escape these over the long term, but it's 0:53:42.160 --> 0:53:45.839 things have been better than we thought or people were 0:53:45.840 --> 0:53:48.920 saying or businesses were saying, so we we could still 0:53:50.400 --> 0:53:55.400 balance it out, moderate some things and keep going. But 0:53:55.560 --> 0:53:59.600 it's not it's not what should happen, right, What should 0:53:59.600 --> 0:54:02.160 happen is that we go into a recession. That's not 0:54:02.320 --> 0:54:05.319 my base case, but I know that's the reality of 0:54:05.400 --> 0:54:06.520 everything that's lined. 0:54:06.360 --> 0:54:09.160 Up all right, Claudia, Thanks so much, Je for joining us. 0:54:09.200 --> 0:54:12.200 I just appreciate getting a few minutes of your time, Claudia, 0:54:12.280 --> 0:54:16.279 Sam founder and independent economists at some consulting. 0:54:18.480 --> 0:54:21.560 Thanks for listening to the Bloomberg Markets podcast. You can 0:54:21.600 --> 0:54:25.400 subscribe and listen to interviews at Apple Podcasts or whatever 0:54:25.480 --> 0:54:29.200 podcast platform you prefer. I'm Matt Miller. I'm on Twitter 0:54:29.400 --> 0:54:31.319 at Matt Miller nineteen seventy three. 0:54:31.760 --> 0:54:32.680 And I'm fall Sweeney. 0:54:32.680 --> 0:54:35.279 I'm on Twitter at pt Sweeney. Before the podcast, you 0:54:35.320 --> 0:54:38.719 can always catch us worldwide at Bloomberg Radio.