Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside
Speaker 1: my co host Matt Miller.
Speaker 2: Every business day, we bring you interviews from CEOs, market pros,
Speaker 2: and Bloomberg experts, along with essential market moving news.
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Speaker 1: Let's talk to our Jersey here, chief US interest rates strategist.
Speaker 1: I just saw Michael McKee leaving here. He's gonna hop
Speaker 1: on the Assella train, get down and washing it in
Speaker 1: DC for that FED meeting tomorrow where you can heckle
Speaker 1: the chairman with some questions. What do you want to
Speaker 1: hear from FED Chairman Jpal tomorrow after the release of
Speaker 1: the results there?
Speaker 3: Well, what I'd like to hear and what we're not
Speaker 3: going to hear is wind up being what's the Fed's
Speaker 3: reaction function and for when they might cut or raise
Speaker 3: interest rates? Obviously, if inflation accelerates meaningfully, they'll raise interest
Speaker 3: rates again. They've already mentioned that that they might have
Speaker 3: to do more if inflation does except right, although we
Speaker 3: got some data today that seems like maybe it is
Speaker 3: going to moderate a little bit, but really, you know,
Speaker 3: what will it take for them to cut? And I
Speaker 3: think that the idea that they're going to remain at
Speaker 3: the peak for some time, which they've hounded on, it
Speaker 3: would be helpful for them, I think.
Speaker 4: To basically be a little bit more explicit, like, look.
Speaker 3: We're not cutting unless the unemployment rate is you know,
Speaker 3: three four percentage points higher than where it.
Speaker 4: Is and inflation is close to our target.
Speaker 3: Right, So saying something like that, which isn't completely explicit,
Speaker 3: is but it still has some meaning around it for markets.
Speaker 3: I think that that would be helpful for the FED
Speaker 3: to maintain monetary policy at this page.
Speaker 2: Close to our target is weak talk week talk weak sauce, right,
Speaker 2: I mean, do you want a hawkish Why don't they say, like,
Speaker 2: we want to get to two percent two hour target?
Speaker 5: You know, I mean at.
Speaker 2: Least for six months or a year. I mean, weren't
Speaker 2: they trying to average long term average two percent?
Speaker 5: And how many decades would that take?
Speaker 3: Yeah, well, that was our old framework. It wouldn't take
Speaker 3: you know, it wouldn't take that long because we remember
Speaker 3: we were at under two percent at least for quite
Speaker 3: a while in the last decade. I think the the
Speaker 3: thing for the FED though, is that if look, if
Speaker 3: inflation is two point seven percent, two point six percent,
Speaker 3: two point five percent trending lower, and you had a
Speaker 3: real spike in unemployment, then everyone would be forecasting inflation to.
Speaker 4: Be significantly lower, right.
Speaker 3: And I think that's the reason why they can say
Speaker 3: like near our target or approaching our target, right, something
Speaker 3: like that. So the FED doesn't like to be as
Speaker 3: explicit as saying, look, we will cut interest rates if
Speaker 3: the unemployment rate is above five percent and unemployment and
Speaker 3: inflation is at two percent if they won't be as
Speaker 3: explicit as that, because they want to leave themselves flexibility
Speaker 3: in case there's a crisis, if there's you know, massive
Speaker 3: corporate defaults for example, and unemployment spikes, but you still
Speaker 3: have you know, year of a year inflation hasn't fallen
Speaker 3: off a cliff. Yet they always want to leave some
Speaker 3: of that flexibility. But you know what's interesting about the
Speaker 3: FED is it's that little minution detail. It's going to
Speaker 3: matter because the Fed's probably not going to do anything tomorrow.
Speaker 3: The Treasury Department, though, at eight thirty in the morning,
Speaker 3: is going to give us some information that might actually
Speaker 3: be market moving.
Speaker 2: So yeah, I mean, yesterday we heard from I guess
Speaker 2: Treasury that they need about what eight hundred billion dollars
Speaker 2: in this quarter.
Speaker 3: Seven hundred and seventy six billion in this quarter of
Speaker 3: of net debt rays. Effectively, that's a little bit higher
Speaker 3: than what our expectation was, a little bit lower than
Speaker 3: most expectations, and the reason is is that they want
Speaker 3: to keep this pretty big cash balance. They want to
Speaker 3: keep a cash balance of around seven hundred and fifty
Speaker 3: billion dollars.
Speaker 4: So in order to do that, with Social Security.
Speaker 3: Payments coming and additional additional payments for medicare as well
Speaker 3: as just just general government deficits, not to mention interest
Speaker 3: payments on the debt, they're going to have to raise,
Speaker 3: you know, quite a lot of money.
Speaker 4: Now.
Speaker 3: Interestingly, remember that seven hundred and seventy six billion dollars
Speaker 3: is what they're selling to the public. It's actually not
Speaker 3: the total debt that's being raised because there's non marketable debts,
Speaker 3: so debt from the Social Security Trust Fund and some
Speaker 3: other trust funds that are being paid down. So what
Speaker 3: you'll see is a deficit for the quarter of around
Speaker 3: half half a trillion dollars.
Speaker 4: Round five hundred billion dollars.
Speaker 3: But you'll but the actual debt that they need to
Speaker 3: raise is much more than that because of the things
Speaker 3: that we've known.
Speaker 4: For thirty years.
Speaker 3: Right, the Sochi Security Trust Fund is is a is
Speaker 3: a net negative and that has to be funded out
Speaker 3: of out of general revenue. So it's it's you know,
Speaker 3: it's all the problems that we've seen over the last
Speaker 3: twenty five years, and we said we're going to be
Speaker 3: problems for the government debt are actually coming home to
Speaker 3: roost right now.
Speaker 1: So I right, I mean, nobody likes to ignore treasury
Speaker 1: auctions more than me. Will you tell me i'd have
Speaker 1: to pay attention to this.
Speaker 3: Well, they've been important, they've been market moving events. When
Speaker 3: you look at auction demand the last couple of weeks,
Speaker 3: they've they've started to slip a.
Speaker 4: Little on on on average.
Speaker 3: We last week, for example, we had pretty weak auctions
Speaker 3: for two year debt and five year notes, but the
Speaker 3: seven year on Thursday one. Okay, But I would say
Speaker 3: that demand is much more mixed. Prior to this past
Speaker 3: month or so, we actually had pretty decent demand at
Speaker 3: auctions people, where I think we're taking advantage of the selloff.
Speaker 4: We you know, hit five percent.
Speaker 3: On ten year notes, and people had, you know, taking
Speaker 3: a little stab at maybe owning a little bit more
Speaker 3: on at auction. So, yeah, we need to see if
Speaker 3: demand is maintained, particularly since tomorrow morning with all of
Speaker 3: that seven hundred billion dollars of debt that needs to
Speaker 3: be raised, there's going to have to the government's going
Speaker 3: to have to increase the size of auctions almost across
Speaker 3: the board.
Speaker 1: So I'm looking at the two tens. That's another thing
Speaker 1: you got me looking at. Unfortunately still inverted, but you know,
Speaker 1: much less than it was before, not only about you know,
Speaker 1: twenty basis points or so are we going to get
Speaker 1: to a point where we actually have longer term yields
Speaker 1: higher than shorter term yields.
Speaker 3: Yeah, I think I think we will, and it will
Speaker 3: probably happen early next year.
Speaker 4: I think it really depends. Though.
Speaker 3: The important nuance of that is, is it because two
Speaker 3: year yields go down a lot, So do we have
Speaker 3: a weakening economy? As Ana Wog and the Bloomberg Economics
Speaker 3: team correct, And if we do have a meaningful slowdown
Speaker 3: in the economy, we could probably see two year yields
Speaker 3: go down, you know, twenty five fifty basis points and
Speaker 3: ten year yields go down less than that, and that's
Speaker 3: how you wind up getting that positively sloped yield curve.
Speaker 3: On the other side, if the if the economy stays
Speaker 3: reasonably robust, but only because we have all of this
Speaker 3: debt issuance, you could see, you know, ten year yields
Speaker 3: maybe up above five percent, up to five point two
Speaker 3: five five point three percent, and that could you know,
Speaker 3: uninvert the yield curve, And that would not.
Speaker 4: Surprise me at all.
Speaker 3: In fact, we actually think that we're we are in
Speaker 3: the process of completely uninverting and we do expect to
Speaker 3: see a positively slope yield curve sometime over the next
Speaker 3: twelve months.
Speaker 2: You raise an interesting point that Treasury Secretary Janet Yellen
Speaker 2: last week she said, the reason we have high yields
Speaker 2: is not to do with the debt and deficits, nothing
Speaker 2: to do with that.
Speaker 5: Look away from there, don't look there.
Speaker 2: It's because of the strength of the economy, because of Bidenomics,
Speaker 2: from the middle out, from the what is it middle out,
Speaker 2: and I can't remember, he says, he has a catchphrase
Speaker 2: that he uses bottom up and middle out. That's what
Speaker 2: it is So is that the case? And will we
Speaker 2: know from you know, the refunding how much of the
Speaker 2: rise in yields is due to you know, the high
Speaker 2: debt and deficits, and how much of it is due
Speaker 2: to the speeding economy.
Speaker 3: Yeah, these are only things that can be estimated. But
Speaker 3: our estimate is that around ninety two percent of the
Speaker 3: move from the July FED meeting to present in the
Speaker 3: tenure yield has been due to the shift in FED expectations.
Speaker 3: And so if you go and you look at what
Speaker 3: the expectation is that the market's been pricing. We were
Speaker 3: pricing for two and a half percent FED funds rate
Speaker 3: in twenty twenty five, We're now pricing for four percent
Speaker 3: in twenty twenty five. So that's a huge move, right,
Speaker 3: I talk about a one hundred and fifty basis point
Speaker 3: move up in where the FED is going to cut
Speaker 3: to or you know, where the market thinks it's going
Speaker 3: to cut to. So that had to manifest itself all
Speaker 3: throughout the treasury curve, and in particular in the longer end,
Speaker 3: because the longer end was anticipating rates to be much
Speaker 3: lower and policy rates to be much lower a few
Speaker 3: years from now, so I think, I think the debt
Speaker 3: dynamics have do have some effect, and they certainly have
Speaker 3: effect on liquidity, but I.
Speaker 1: Forget to just leave it there. But we appreciate that.
Speaker 1: Ira Jersey, Chief US Interest Rate Strategies for Bloomberg Intelligence.
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Speaker 1: Caterpillar they make the big tractors and all that kind
Speaker 1: of good stuff back hose. They reported some numbers today
Speaker 1: which were in line, I guess, pretty solid. But it's
Speaker 1: all about the outlook for these long cycle industrial companies
Speaker 1: and that's what's got some investors spook here. As John mentioned,
Speaker 1: is stocks down about five percent here today. Let's break
Speaker 1: it down with the man who knows what's happening with
Speaker 1: this company, Chris Chield. You know he covers the big
Speaker 1: industrial companies for Bloomberg Intelligence. He's located down in Princeton,
Speaker 1: New Jersey, the HQ if you will of a Bloomberg Intelligence. Hey, Chris,
Speaker 1: talk to us about Caterpillar you've been calling on I
Speaker 1: know in the last a few quarters we've been speaking
Speaker 1: to you about Boy, these companies are putting up great numbers,
Speaker 1: but investors are really looking forward and they're a little
Speaker 1: bit concerned that seemed to come to fruition here today.
Speaker 7: What'd you see, Yeah, I mean to your point, I mean,
Speaker 7: the quarter was fine, actually was quite good, with better
Speaker 7: than expected margin performance and earnings. You know, pricing continues
Speaker 7: to be really strong, but what we saw was a
Speaker 7: pretty broad deterioration when it comes to their leading indicators,
Speaker 7: you know, backlog fail for the first time in three years.
Speaker 7: Implied orders also dropped sequentially in year over year, and
Speaker 7: they're fourth quarter sales outlook was somewhat kind of disappointing
Speaker 7: and below normal seasonality and consensus, and there was a
Speaker 7: fair amount of trepidation about the macro backdrop heading into
Speaker 7: the print. And I think these softer orders and backlog
Speaker 7: trends that we saw aren't necessarily encouraging and what was
Speaker 7: likely to be a softer economic environment next year and
Speaker 7: really just kind of intensify some of those concerns around
Speaker 7: the duration of the cycle.
Speaker 2: Yeah, So we saw the year on year decline of
Speaker 2: one point nine billion dollars in the backlog. What exactly
Speaker 2: does that mean? Does that mean you know exactly what
Speaker 2: I think it does that they had orders that were
Speaker 2: that much lower? I mean, how much were there was
Speaker 2: the backlog in total?
Speaker 7: Yeah, So I would say the moderation in the backlog
Speaker 7: wasn't necessarily surprised, and I think it was somewhat to
Speaker 7: be expected, just giving normalizing supply chains and some of
Speaker 7: the lead time shrinking with some of the product availability.
Speaker 7: But I think the magnitude of the decline was kind
Speaker 7: of what spook people, particularly on the order front. Orders
Speaker 7: were down about fifteen percent versus prior year and twenty
Speaker 7: percent sequentially. So I think that sheer magnitude and just
Speaker 7: the optics of But.
Speaker 2: What's the magnitude of the Is a one point nine
Speaker 2: billion dollar drop a ten percent drop in the backlog?
Speaker 2: Or is it a fifty percent drop in the backlog?
Speaker 7: No, it's it's an eight and a half percent decline sequentially.
Speaker 6: So while not but.
Speaker 7: It's the first time we've seen backlogs essentially peaked.
Speaker 5: This is the first time sequentially We're not talking about
Speaker 5: the year over year drop.
Speaker 1: Yeah right, Yeah, that's I could see how that was
Speaker 1: spook people. What's Kat saying about, like, which, are there
Speaker 1: any particular customer segments that are maybe weaker than expected?
Speaker 1: What are they saying about kind of where this might
Speaker 1: be coming from.
Speaker 7: Yeah, I think I'll actually maybe start on the construction side.
Speaker 7: I think that was one positive surprise, particularly in North America.
Speaker 7: North America continues to be quite resilient, and end user
Speaker 7: demand continues to be pretty strong really across their business.
Speaker 7: The energy and transportation business came in a little bit
Speaker 7: weaker than we had anticipated, and it's some there was
Speaker 7: some softness on the mining side on the top line,
Speaker 7: it seems to be some timing issues, but also there
Speaker 7: was some weakness in the aftermarket business, which was a
Speaker 7: little surprising just given the age of the fleet and
Speaker 7: utilization still remains quite high. So those bear kind of
Speaker 7: watching going forward here.
Speaker 1: So it give us a sense of a cycle here
Speaker 1: for like a Caterpillar. I mean, you said, this is
Speaker 1: the first time in three years they've had down order. Sequentially,
Speaker 1: that sounds like a pretty good cycle, But is it
Speaker 1: our downcycles similarly like in length?
Speaker 7: No, as much as we like to think every cycle
Speaker 7: is the same, they tend to be different. And I
Speaker 7: would say, you know, even though backlog had peaked here,
Speaker 7: you know, we are still at historically very elevated levels
Speaker 7: and there is really above average production visibility as we
Speaker 7: look forward to next year. But the optics are I mean,
Speaker 7: you have a really a cyclical company with declining orders
Speaker 7: a declining backlog. It doesn't just the optic of that
Speaker 7: are not a favorable setup for the company moving into
Speaker 7: next year.
Speaker 1: How about the Inflation Reduction Act. Isn't that like lots
Speaker 1: of Caterpillar type stuff you need?
Speaker 7: So it is, And I guess one of the caveats
Speaker 7: with this cycle is it's different because we just have
Speaker 7: an immense amount of fiscal stimulus coming through the pipe,
Speaker 7: and I'd say a lot of that has really kind
Speaker 7: of yet to materialize to the financial results of a
Speaker 7: lot of these companies and as part of what's propping
Speaker 7: up the backlog here. So I think that does help
Speaker 7: provide an offset. I think some of the decline is
Speaker 7: certainly attributable to the normalizing supply chain and shrinking lead time,
Speaker 7: So maybe a little bit of an overreaction, but yeah,
Speaker 7: this will certainly provide a multi year tail wind for
Speaker 7: the company and really probably provides a little bit more
Speaker 7: of a favorable outlook for a lot of the construction
Speaker 7: machinery producers relative to some of the other machinery and markets.
Speaker 2: What are the biggest competitors and do they face a
Speaker 2: threat there? I mean, I look through all the on
Speaker 2: the r V page on the Bloomberg and I don't
Speaker 2: see anything that really stands out as you know, a
Speaker 2: household name other than maybe Mitsubishi.
Speaker 5: But you know, who are they facing off against?
Speaker 7: Yeah, so, I mean, they're the undisputed leader in the
Speaker 7: construction machinery space. When it comes to mining, it's essentially
Speaker 7: a duopoly with them in Kamatsu, and Kamatsu is a
Speaker 7: pretty significant player on the construction side as well. Everyone
Speaker 7: else tends to be subscale. They do compete with Deer
Speaker 7: also on construction. They're starting to grow their construction business,
Speaker 7: so I would expect them to be a more formidable
Speaker 7: competitor in the years to come. But really it's kat
Speaker 7: and Kamatsu. Those are the dominant forces in the market.
Speaker 1: How about geographies, Chris, particularly China. What's their exposure to
Speaker 1: China and what are they saying about China.
Speaker 7: China's weak and continues to weaken really no signs of
Speaker 7: a turnaround yet. So you know, historically China has been
Speaker 7: roughly ten to ten five to ten percent of consolidated
Speaker 7: sales at Caterpillar. This year, we're going to be well
Speaker 7: below the five percent in the lowest and quite some time.
Speaker 7: Not really hearing any sort of optimism coming out of
Speaker 7: that region.
Speaker 1: And how about Europe, because I know I can see
Speaker 1: here on the p GEO page that's EAM is about
Speaker 1: twenty percent of revenue. What are they seeing out of Europe?
Speaker 1: Because I know people are concerned about that, those economies
Speaker 1: over there.
Speaker 7: Yeah, and you know that actually held up a little
Speaker 7: better than I had anticipated. We're just starting to hear
Speaker 7: this earning season from a number of number of other
Speaker 7: machinery producers that there had been some weakening and the
Speaker 7: sentiment over in Europe and even some softer orders. Didn't
Speaker 7: really get that coming out of cat and some of
Speaker 7: their retail sales trends didn't seem to suggest a significant
Speaker 7: deterioration there yet. So again another item worth kind of
Speaker 7: monitoring moving forward.
Speaker 2: We just saw the Eurostat growth figures, by the way, Paul,
Speaker 2: so the European economy contracted zero point one percent in
Speaker 2: the third quarter, and we were looking for just a segnation,
Speaker 2: So it's getting smaller there. I guess consumer prices are
Speaker 2: coming down, which is good. They got a two handle
Speaker 2: on them, two point nine percent in October.
Speaker 1: Okay, yeah, hey, Chris, just looking ahead a little bit.
Speaker 1: My good friends at John Dear the nice Green Tractors
Speaker 1: are reporting in a few weeks here, and you know,
Speaker 1: I always load to look at the Deer results because
Speaker 1: it gives you a great handle on kind of how
Speaker 1: the state of the farmer out there, how are things
Speaker 1: at Deer.
Speaker 7: So I think Deer is going to have a more
Speaker 7: challenging setup into twenty twenty four relative to Cat. We
Speaker 7: think the egg market is already peaked, so we're kind
Speaker 7: of anticipating mid digit volume declines next year. Now, remember Deer,
Speaker 7: we'll report their fiscal four Q results later in November,
Speaker 7: so they'll provide the kind of first look at twenty
Speaker 7: twenty four. But we're certainly expecting a lower volume market.
Speaker 7: On the ag side, we're coming off a number of
Speaker 7: strong years, but you're starting to see commodity prices. Is
Speaker 7: a rural crowd often quite a bit farmer income is
Speaker 7: going to be down twenty five percent this year, so
Speaker 7: really i'd say a less favorable outlook on the ag
Speaker 7: side in twenty twenty four and the farmer.
Speaker 1: I mean, when the farmer has cash, he or she
Speaker 1: goes out and buys tractors and stuff like that. But
Speaker 1: it's it's a cyclical business, so the flip side is true.
Speaker 7: Right, Yeah, any the magnitudeers sound pretty draconian, but I
Speaker 7: think we'll still be, you know, second or third highest
Speaker 7: all time in terms of that farm income. So we'll
Speaker 7: be down from a peak in twenty twenty two. It's
Speaker 7: still going to be historically strong. But I would just
Speaker 7: expect farmers to dial back some of the spending just
Speaker 7: given what's going on with some of the farm fundamentals
Speaker 7: and again the weaker crop prices that we've seen.
Speaker 1: All right, great stuff, I'm just gonna deer right now
Speaker 1: in the stocks off about fifteen percent year to date,
Speaker 1: so there's the market discounting good twelve to eighteen months
Speaker 1: in the future. On that name, Chris Chierlino, we always
Speaker 1: appreciate getting a few minutes of his time. He's the
Speaker 1: industrials analysts at Bloomberg Intelligence.
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Speaker 1: Looking at Ingo that is the Bloomberg Index browser kind
Speaker 1: of gives you the performance your day, month to day
Speaker 1: of all the big indexes out there, and for the
Speaker 1: fixed income space in the US it is red with
Speaker 1: one exception, US corporate high yield up four point three
Speaker 1: eight percent. Why is that? Let's check out with our
Speaker 1: next guest, Ken Monaghan, co director of high Yield at
Speaker 1: a Mundi US. He's based in Durham, North Carolina, but
Speaker 1: up here in New York. Ken twenty twenty two, as
Speaker 1: we've talked about before, was the mother of all disasters
Speaker 1: for fixed income investors. This year is not much better
Speaker 1: through the first you know, nine ten months. What's going
Speaker 1: on in the corporate high yield mark? Why is that
Speaker 1: showing some positive returns?
Speaker 8: You're right, Paul, I think it's been a reasonable year
Speaker 8: considering how bad we've had in the past, it's a
Speaker 8: decent year, and it's a year where risk is outperformed.
Speaker 4: Now.
Speaker 9: October thus far has been miserable for risk.
Speaker 8: But if you're looking at the year to date, we
Speaker 8: see the triple C credits are up, you know, really
Speaker 8: threefold what double b's are.
Speaker 9: So we've had a fair amount of spread compression.
Speaker 1: So but I mean, everybody's been telling Matt and I
Speaker 1: that we're going to have a recession any day now.
Speaker 1: If that's the case, why are people taking incremental risk
Speaker 1: that they need to that they do when.
Speaker 5: They tie the threads.
Speaker 2: I mean, if you're paying me, I get it. But
Speaker 2: if you're not paying me, why am I buying it?
Speaker 8: Well, if you look at spreads where they are right now,
Speaker 8: arguably they're only at the five and ten year averages,
Speaker 8: so they're not looking particularly cheap. On the other hand,
Speaker 8: that the economy has done pretty well, and I think
Speaker 8: that that's really what's been driving spreads is you know,
Speaker 8: we'd all been waiting or expecting a a recession, whether
Speaker 8: it was in the later half of the back early
Speaker 8: part of the first half of the year, or then
Speaker 8: the back half of this year, and then people are
Speaker 8: forecasting it for early twenty twenty four, and thus far
Speaker 8: the economy continue to power through, and I think that's
Speaker 8: what's been driving spreads.
Speaker 2: But aren't you worried that defaults are going to start
Speaker 2: to pick up?
Speaker 8: Well, interestingly enough, if you look at the Moody's estimates,
Speaker 8: they're expecting defaults will peak sometime or the spring of
Speaker 8: next year, but at a fairly reasonable rate. But let's
Speaker 8: remember when Moody's puts out its number is it is
Speaker 8: an unweighted number, So they count one hundred million dollars
Speaker 8: default the same way they count a billion dollar default.
Speaker 8: If you look at it on an adjusted basis, where
Speaker 8: they're using waitings based on the amount of debt outstanding.
Speaker 8: The default rate for this year is still running under
Speaker 8: two percent. Now they're expecting the default rate to rise
Speaker 8: into the.
Speaker 9: Mid to high fours. But that's a pretty big differential.
Speaker 8: So what it tells us is the companies that are
Speaker 8: getting into more difficulty tend to be smaller companies rather.
Speaker 9: Than larger ones. At this point, it's.
Speaker 1: A new issue market. Like I used to love throwing
Speaker 1: out some high yield from my clients back in the
Speaker 1: day because I love the media, cable paper what's the
Speaker 1: what's the new issue market like these days?
Speaker 8: It's pretty soft right now. Not surprisingly, I think we
Speaker 8: had a pretty robust calendar coming into September and that
Speaker 8: there were a number of companies that had financings, whether
Speaker 8: it was M and A related or LBO related that
Speaker 8: needed to get done, and they got those done.
Speaker 9: But since then, obviously, treasuries.
Speaker 8: Have risen fairly dramatically, and then on the back of
Speaker 8: the fifty beeps treasury move we've had in the last
Speaker 8: four or five weeks, we've had about a seventy five
Speaker 8: basis point widening of high yield. So I think companies
Speaker 8: have taken a step back and said, let's wait a
Speaker 8: minute here, let's hope that spreads get tighter, or hope
Speaker 8: the treasury rates come down and moderate, and we'll find
Speaker 8: a better financing opportunity. Now, the problem with that, from
Speaker 8: our perspective is if you wait too long and we
Speaker 8: are right and we do see more of an economic
Speaker 8: slowdown in twenty twenty four, which is what our expectation is,
Speaker 8: that would imply, as you're suggesting, that spreads ought to
Speaker 8: be wider, not tighter, And if spreads are not wider,
Speaker 8: then the FEDS likely to keep its foot on their
Speaker 8: break pretty hard, because that says the economy is powering
Speaker 8: along too strongly and they're going to have to react.
Speaker 2: Or else you're playing along too much. You need to
Speaker 2: get a little bit more vigilante, don't you know?
Speaker 5: What can you do?
Speaker 2: By the way, in terms of, you know, pivoting your strategy,
Speaker 2: you can't. Can you go up in quality if.
Speaker 8: You're a co director of high Year, Sure, yeah, and
Speaker 8: we've been doing a fair amount of that, and I
Speaker 8: think then the other thing you do is you go
Speaker 8: into sectors where you have a greater degree of certainty.
Speaker 8: So you know, we look at affluent consumers are still spending.
Speaker 8: Cruise ship companies happen to be doing extremely well, and
Speaker 8: actually if you look at their bookings through twenty twenty four,
Speaker 8: they're solidly booked. You know, we've seen some softness in
Speaker 8: the airline space, but the cruise ships happen to be different.
Speaker 8: You know, even if you're looking at something like homebuilders,
Speaker 8: you would say to yourself, well, how could homebuilders be
Speaker 8: doing well in this kind of environment? Well, right now,
Speaker 8: you know, secondary or home sales have dried up because
Speaker 8: anyone that's got a three and a half percent mortgage
Speaker 8: or four percent mortgage, isn't going to sell their house
Speaker 8: and buy something new unless they absolutely have to because
Speaker 8: they're moving, for example, to a whole other state. So
Speaker 8: the only game in town right now is buying a
Speaker 8: new house. And the margins on the home building industry
Speaker 8: over the last several years have accelerated in a significant way,
Speaker 8: so they've got room to play around and offer extra
Speaker 8: financing support for the first two or three years. They
Speaker 8: can bring down the quality or going to put carpeting
Speaker 8: in instead of hardwood floors.
Speaker 9: They've got room to maneuver. But the homebuilders are actually
Speaker 9: doing quite well.
Speaker 1: How about the cable slash telecom space, big big issues
Speaker 1: in the high healed space historically. How about those you
Speaker 1: guys have exposure there and what do you like or
Speaker 1: don't we?
Speaker 10: We do?
Speaker 9: We do?
Speaker 6: You know?
Speaker 9: The cable sector. You know, if we look back.
Speaker 8: And you look at some of the names in the
Speaker 8: space on the equity side, over the last couple of years,
Speaker 8: they've been under pressure ye big time. And I think
Speaker 8: that that's reflecting a couple of things. And one is
Speaker 8: the competitiveness of wireless alternatives yep.
Speaker 9: And then there was.
Speaker 8: Cord cutting is obviously going on, but I think we've
Speaker 8: seen some changes in the last several months.
Speaker 1: They always pay their interest in principle, though.
Speaker 8: They are always paying their interest in principle, and I think,
Speaker 8: you know, think about how many of us are still
Speaker 8: working from home, at least part time, maybe not in
Speaker 8: the office every day of the week, and those people
Speaker 8: need that.
Speaker 1: Average office professional in Durham, North Carolina, what are they
Speaker 1: doing how many days a week back in the office.
Speaker 8: I'm going to say we're in at least three days
Speaker 8: a week, and I'm going to say that's what most
Speaker 8: people are doing.
Speaker 1: That's the new normal, man.
Speaker 5: Yeah, no, I know it's the real world.
Speaker 1: That's what the real people are doing.
Speaker 4: Well.
Speaker 2: I think bosses are trying to change that, but employees
Speaker 2: are fighting back.
Speaker 1: Yeah, we just need a good recession, all right, real quick,
Speaker 1: What do you expect from your Federal Reserve tomorrow?
Speaker 9: I think it's going to be a quiet day from
Speaker 9: the Fed.
Speaker 8: I think that there's you know, there's reasons why they
Speaker 8: may go the other way and raise rates, but I
Speaker 8: don't think that that's in the cards right now.
Speaker 9: I think we're in a holding pattern all right.
Speaker 1: Again, Looking at the then function of Bloomberg Index Browser,
Speaker 1: US mortgage backed securities, US aggregate, US government credit, US Treasury,
Speaker 1: US universal all down two three four percent year to date.
Speaker 1: The one exception, US corporate high Yield a positive four
Speaker 1: point three eight percent return. But as you mentioned, Ken,
Speaker 1: on the month, down one point four percent of all
Speaker 1: the bonds.
Speaker 5: If you look at JNK or HyG, they're not doing
Speaker 5: that great.
Speaker 1: Yeah, yeah, so interesting stuff there, but positive for the year,
Speaker 1: not positive for the year. And on Friday we'll talk
Speaker 1: with Joe Meisek talked about the immunis bond market.
Speaker 5: I'm very much looking forward up to that.
Speaker 1: Ken Monahan, thank you so much for joining us. Ken Monahan,
Speaker 1: co director of High Yield for a Mundi US based
Speaker 1: in Durham, North Carolina.
Speaker 6: You're listening to the team Ken's are Live program Bloomberg
Speaker 6: Markets weekdays at ten am Eastern on Bloomberg dot Com,
Speaker 6: the iHeartRadio app, and the Bloomberg Business App, or listen
Speaker 6: on demand wherever you get your podcasts.
Speaker 1: We're right smack in the middle of earnings, Marcus digesting
Speaker 1: them on a daily basis. Got some some more earnings
Speaker 1: after the close today AMD then of course Apple after
Speaker 1: the close, we want to go across the pond and
Speaker 1: see how things are over in Europe with earnings, with markets,
Speaker 1: where's the performance, where's the risk? And we do that
Speaker 1: with one Tim Craig at He is a director of
Speaker 1: research and he's also a senior European strategist for Bloomberg Intelligence,
Speaker 1: joining us from Queen Victoria Street, the global European global
Speaker 1: headquarters of Bloomberg and it is the smoking hot building,
Speaker 1: just crazy the building over there. Hey, Tim, thanks so
Speaker 1: much for joining us here, give us the headlines. Just
Speaker 1: step back thirty thousand feet for our listeners and viewers,
Speaker 1: or maybe aren't really up to date on how the
Speaker 1: European markets have been performing this year.
Speaker 11: Yeah, well, we have been behind the US from the
Speaker 11: standpoint of market performance. We don't have the big tech
Speaker 11: that's driven the S and P five hundred back up
Speaker 11: over the course of into autumn. That said, we also
Speaker 11: don't have the big tech that's been under pressure since
Speaker 11: the July August peaks. And so while the US has
Speaker 11: certainly taken a pumbling and we've sold off, we've not
Speaker 11: sold off as much.
Speaker 10: So that's sort of the quick synopsis.
Speaker 2: So we've taken a pumbling, you've sold off, but not
Speaker 2: as much.
Speaker 10: Today.
Speaker 2: We learn though that your third quarter showed a contraction
Speaker 2: in growth and we were growing five percent.
Speaker 10: Buddy, Hey, there you go.
Speaker 2: No, I mean, you know, obviously backward looking isn't what matters.
Speaker 2: And as Caterpillar I think proves today people really care
Speaker 2: about the outlook.
Speaker 5: As if we didn't know that already.
Speaker 2: How is the outlook for European earnings compared to US earnings?
Speaker 11: So, Matt, I think it's really interesting thinking about the
Speaker 11: ernience picture, you know, again, the compared and contrast. You know,
Speaker 11: the US went through a few quarters of Ernien's contraction
Speaker 11: while Europe was still gaining a lot of that. Ernians
Speaker 11: contraction in the US was big tech oriented, and what
Speaker 11: we're feeling now in Europe and we will see in
Speaker 11: earnings decline again this quarter, is actually a lagging impact
Speaker 11: of the decline that we've seen in things like energy
Speaker 11: and metals prices, which are really big over here, much
Speaker 11: more so than they are in US markets. The thing
Speaker 11: I don't think either market has necessarily felt is the
Speaker 11: full impact of the spike in interest rates that we've
Speaker 11: had and how that's going to have an impact on
Speaker 11: consumer and businesses as we go into twenty twenty four,
Speaker 11: which does play into an awful lot of the earnings
Speaker 11: commentary that we're hearing through the reporting period. Just to
Speaker 11: give you a couple of numbers, we're about halfway through
Speaker 11: here in Europe, a little behind where you are where
Speaker 11: you are.
Speaker 10: In the US.
Speaker 11: It sounds okay that we've got about fifty percent of
Speaker 11: the companies that have beat earnings expectations, about thirty five
Speaker 11: that have missed, But in fact that's the worst performance
Speaker 11: from the standpoint of beats versus misses that we've had
Speaker 11: since the pandemic low. So I would categorize this it's
Speaker 11: a pretty disappointing earning season.
Speaker 1: Hey, Tim, talk to us about valuation. Where are you
Speaker 1: guys over there in terms of valuation right now?
Speaker 11: Yeah, So you look at the broad European market where
Speaker 11: twelve and a half times forward earnings, it's down from
Speaker 11: a recent highs of thirteen ish, clearly far below where
Speaker 11: the US trades. You can find markets like the German
Speaker 11: Docks index that's retraced all the way to ten times
Speaker 11: forward earnings, and that's with a heavy dose of the
Speaker 11: big German auto companies that are facing increasing pricing competition
Speaker 11: and ev competition from China. So you know, it's clearly
Speaker 11: there's a value tilt from the standpoint of an absolute
Speaker 11: multiple across the European markets. But I would also say,
Speaker 11: and you know it's true from a US perspective as well,
Speaker 11: with interest rates being as high as they are, and
Speaker 11: they've certainly ratcheted up here market by market over the
Speaker 11: course of the autumn. You know, that does take a
Speaker 11: toll on what you're willing to pay in terms of
Speaker 11: market valuation. So what would seem cheap from an absolute
Speaker 11: level ten times twelve times a year ago now isn't
Speaker 11: quite so cheap on our fair value work because interest
Speaker 11: rates are simply higher.
Speaker 2: Yeah, I wonder how important China is to European earnings.
Speaker 2: And I know they haven't fully penetrated the entire continent,
Speaker 2: but when I was over there, you know, they had
Speaker 2: made their way up through Africa and straight to the
Speaker 2: tip of Italy. You know, is it a bigger driver
Speaker 2: of well, let's say, revenue growth China than it is
Speaker 2: for US companies significantly?
Speaker 11: So the recent analysis we did looking at the stock
Speaker 11: six hundred eighty of the six hundred have got overtly
Speaker 11: easy to define significant contribution. If you add it up,
Speaker 11: it's about four hundred and fifty billion in revenue. These
Speaker 11: companies aggregate to be about thirty percent of the European
Speaker 11: market in terms of index weight, So any way you
Speaker 11: want to cut it, there's a lot of companies.
Speaker 10: They're big companies, and it's a lot of revenue.
Speaker 11: And what we're seeing in the third quarter maybe no
Speaker 11: surprise given the faltering, stuttering economic growth in China is
Speaker 11: that business is also faltering a bit. They already mentioned
Speaker 11: the German autos as a case in point. Contrast that
Speaker 11: with Stillantis today, which doesn't have so much China exposure
Speaker 11: but more US exposure, and it was a little bit better.
Speaker 11: The luxury good companies have talked about weakening China economic activity,
Speaker 11: and there are several others that are showing that they're
Speaker 11: signs of weakness. Now two things other to mention on China,
Speaker 11: this was still an easy comparison for three Q. Remember
Speaker 11: they didn't open back up until October and November last year,
Speaker 11: so it's really the fourth quarter that is going to
Speaker 11: be a more difficult comparison.
Speaker 10: And on into the first quarter.
Speaker 11: Of next year, So if things are still stuttering, that
Speaker 11: business is going to be more of a challenge. And
Speaker 11: the other thing, obviously, thinking about twenty twenty four, the
Speaker 11: more pressure there is on the economy, the more likely
Speaker 11: there's going to be fiscal and monetary measures to stimulate
Speaker 11: the economy, which might all of a sudden turn this
Speaker 11: around as we look into the back half of next year,
Speaker 11: and clearly the markets will discount that. Right now, everybody's
Speaker 11: focused on current weakness that may be short lived.
Speaker 1: Hey, Tim, you travel all around the continent, all around
Speaker 1: your speaking to institutional investors. What did they want to know?
Speaker 1: I mean, what's kind of the common question, top question
Speaker 1: you get asked?
Speaker 11: Yeah, you know, Paul, I guess a couple things come
Speaker 11: to mind. It was just in an event last week
Speaker 11: in Frankfurt, And at this point it really is all
Speaker 11: about the macro outlook and what's going on with monetary policy,
Speaker 11: When is the pivot going to happen, and how much
Speaker 11: of that pivot does then translate into a reduction in
Speaker 11: things like ten year yields because it's not an immediate
Speaker 11: feed through, but that's that's crucial because the higher we are,
Speaker 11: the longer we are on interest rates, the more of
Speaker 11: an impact there is on business and consumer and you
Speaker 11: know that's a huge pressure point for the twenty twenty
Speaker 11: four outlook.
Speaker 1: All right in suburban London near your pad? What's a
Speaker 1: good pint going to cost me?
Speaker 10: A good pint when I go for Halloween today? Paul,
Speaker 10: there we go?
Speaker 12: Thank you?
Speaker 10: Is gonna be about seven pounds for a pint?
Speaker 9: Wow?
Speaker 5: Seven pounds?
Speaker 2: And do you do you do like Guinness extra cold
Speaker 2: or do you have them pull you an actual ale
Speaker 2: from one of those old school taps?
Speaker 6: Oh?
Speaker 10: I like I like the cast ales definitely. See which delicious?
Speaker 11: Best best thing is a Trappist dale though from from
Speaker 11: Belgium that that's the best beer, that's.
Speaker 1: The best beer.
Speaker 10: Hey are you?
Speaker 1: Are you still avoiding the congestion tax in London by
Speaker 1: riding your bike to the office?
Speaker 4: I do.
Speaker 10: I rode this morning. See he's one of those people
Speaker 10: that I'll write, I'll ride home this afternoon.
Speaker 5: See that's smart.
Speaker 2: I'm gonna avoid the congestion charge in New York by
Speaker 2: getting a garage.
Speaker 5: On sixtieth Street.
Speaker 1: Yeah, we're gonna get John Tuckerolle bike.
Speaker 9: Yeah, I'm going to ride my bike in the morning.
Speaker 1: The Lincoln Tunnel in the morning.
Speaker 4: I don't think they allow bikes in Lincoln.
Speaker 1: All right, Tim, thanks so much for joining us, as
Speaker 1: I always appreciated. Tim Craig Eddy is the director of
Speaker 1: research over there in London, uh and he's a senior
Speaker 1: European strategist for Bloomberg Intelligence. Ton tons of experience in
Speaker 1: the equity markets. Morgan Stanley did a little hedge fund work,
Speaker 1: and then we nab them at Bloomberg Intelligence back in
Speaker 1: the day.
Speaker 6: You're listening to the tape. Cat's a our live program,
Speaker 6: Bloomberg Markets weekdays at ten am Eastern on Bloomberg Radio,
Speaker 6: the tune in app, Bloomberg dot Com, and the Bloomberg
Speaker 6: Business App. You can also listen live on Amazon Alexa
Speaker 6: from our flagship New York station. Just say Alexa play
Speaker 6: Bloomberg eleven thirty.
Speaker 1: Let's take a look at these markets. Where do we
Speaker 1: go from here? With Rightsmack in the middle of earnings,
Speaker 1: people starting to think about next year, where to be positioned.
Speaker 1: Our next guest thinks about that stuff as well. Lucas
Speaker 1: to Mickey. He's a founder managing partner of LRT Capital Management. Lucas,
Speaker 1: thanks so much. For joining us here, give us just
Speaker 1: let's start off by just getting a sense of how
Speaker 1: you guys deploy capital LRT capital management kind of what's
Speaker 1: your strategy that you guys deploy.
Speaker 13: Hey, Matt, thanks for having me.
Speaker 1: Yeah, to give you a quick overview.
Speaker 13: Are really trying to focus on business quality and business resilience.
Speaker 13: So to us, quality means free things.
Speaker 4: It means some.
Speaker 13: Kind of durable competitive advantage. It means the ability to
Speaker 13: grow and reinvest capital at high incremental rates of return,
Speaker 13: and it means management teams that have demonstrated a good,
Speaker 13: good track record of allocating shareholder capital.
Speaker 2: All right, So looking at all those variables, what do
Speaker 2: you like?
Speaker 13: Well, I think you know, from a macro perspective, we're
Speaker 13: likely heading towards an economic slow down, if not an
Speaker 13: outright recession. And so today, you know, the theme for
Speaker 13: me is really investing in resilient companies. So the free
Speaker 13: companies that we like most today are Chemed, which is
Speaker 13: kind of an odd business. They own two businesses within it.
Speaker 13: We also love Elevans and trying it.
Speaker 1: All right, let's start with Kem here, tell me the
Speaker 1: kind of what business they're in. I'm looking at the
Speaker 1: stock here. It's it is an eight and a half
Speaker 1: billion dollar market cap company. Stock stocks up about ten
Speaker 1: percent year today. So tell us about the call there.
Speaker 1: What do they do and what's the investment call?
Speaker 13: Yeah, so Chaman is a very odd company in that
Speaker 13: they own two businesses that are completely unrelated to each other.
Speaker 13: They own Vitas, which is a hospice care provider, and
Speaker 13: Roto Router, which is a commercial and plumbing service. Yeah,
Speaker 13: I don't see the connection, but go on, No, there's
Speaker 13: no connection on the surface, but the real connection is
Speaker 13: that these are very resilient businesses from macroeconomic perspective. So
Speaker 13: Vitas or Vitas provides end of life care effectively, and
Speaker 13: Medicare of course is the largest customer. And so for
Speaker 13: most people, you know, the statistics say you're spending somewhere
Speaker 13: between twenty five to thirty percent of your entire life's
Speaker 13: healthcare cost just in the last few months. You know,
Speaker 13: when you're effectively dying in the hospital, get very expensive care,
Speaker 13: very expensive treatment, and that's a very big cost for Medicare.
Speaker 13: And frankly, you know, not everyone sees the benefits of that.
Speaker 13: So many people opt for hospice care, which is effectively
Speaker 13: palliative care where you end treatment and you're just receiving
Speaker 13: medication to manage pain and you know, improve your comfort
Speaker 13: of life. And obviously that saves costs, and frankly, you
Speaker 13: know a lot of people see that as a more
Speaker 13: dignified way to go.
Speaker 1: And you know, just just looking at this, Lucas, you
Speaker 1: just don't see many corporate structures like this anymore, just
Speaker 1: pure holding companies, particularly the ones that that own just
Speaker 1: two businesses. What kind of attracted you to the company?
Speaker 13: Well, I followed it for a long time, and I
Speaker 13: don't think I'm the only one. But what frankly attracted
Speaker 13: me to their company is up until a few years ago,
Speaker 13: their website looked like it was straight from the nineteen nineties.
Speaker 13: And that might sound counterintuitive, but that that was to
Speaker 13: me very odd signal that this is a company that's
Speaker 13: really focused on business operations and not promoting things. And
Speaker 13: so generally speaking, we like non promotional, you know, down
Speaker 13: to earth kind of management teams.
Speaker 2: And it's up, yeah, eighty seven percent over the past
Speaker 2: five years, of ten percent this year, eighty seven percent
Speaker 2: of the past five years total return.
Speaker 5: It's done well.
Speaker 2: The roto Router business also you know, these are two
Speaker 2: businesses that people are never going to not need. If
Speaker 2: I can split my infinitive just to make the point,
Speaker 2: and I get that, do they spin off at some point.
Speaker 5: One or the other?
Speaker 2: Do they break into two?
Speaker 10: Do you think?
Speaker 13: I think that's long been a theme and the thinking,
Speaker 13: I frankly don't have a problem with the business the
Speaker 13: way it is. They have opportunities to deploy capital, primarily
Speaker 13: in the roto router business by buying out franchisees from
Speaker 13: some of their territories, and then they have opportunities to
Speaker 13: buy back stock and the shares you know, are trading down,
Speaker 13: and as you mentioned, the stock is up a little
Speaker 13: bit this year, but that's largely happened last week on
Speaker 13: the back of good earnings. So you know, you're gonna
Speaker 13: have ups and downs, but it's a very resilient business.
Speaker 13: They've grown about four percent per year in terms of revenue,
Speaker 13: but they managed to translate that into a fourteen percent
Speaker 13: EPs growth over the same you know, last ten years
Speaker 13: or so.
Speaker 1: All right, how about E l V. Elevans Health another
Speaker 1: healthcare name.
Speaker 13: Yeah, so this is Elevants. This is the former Anthem
Speaker 13: insurance business. You know, so you may have sort of them.
Speaker 13: They rebranded themselves. We love the industry, broadly speaking, the
Speaker 13: health insurance industry. It's a very consolidated business. There's five
Speaker 13: players that command the majority of the market, a couple
Speaker 13: of smaller ones. And you know this is this company
Speaker 13: is called a health insurance company, but that's really a misnomer.
Speaker 13: Only about ten percent of what they do is tied
Speaker 13: to carrying risk. The majority of their business is managed
Speaker 13: care for the government, manage Medicare, Medicaid, and corporate accounts
Speaker 13: in which companies self insure, and so there's very little
Speaker 13: insurance risk in this space. It's really a health administrator,
Speaker 13: if you will. And it's so regulated that they're frankly
Speaker 13: not allowed to even you know, the amount of profit
Speaker 13: they're allowed to make is regulated as well. And you
Speaker 13: see that between all the companies there's very limited competition.
Speaker 13: And call it GDP plus growth largely tied to the
Speaker 13: growth and healthcare costs.
Speaker 2: Yeah, we get that one. Let's get to t neet
Speaker 2: try net. It's also kind of an employee benefits company, right.
Speaker 9: Yeah, so this is slightly different.
Speaker 13: It's a very small company, about a five billion market cap.
Speaker 13: So this is a company that serves and medium sized
Speaker 13: businesses that are looking to get employee benefits. And employee
Speaker 13: benefits may mean many things, primarily HR health insurance.
Speaker 9: Disability insurance, etc.
Speaker 13: But in practice ninety percent of what drives their business
Speaker 13: is health insurance. So what they do is they effectively
Speaker 13: get a bunch of small employee or employers with small
Speaker 13: employee numbers. They get them together and using their bulk
Speaker 13: purchasing power, acquire health insurance at better rates, pass the
Speaker 13: savings onto their customers, and keep, of course a small
Speaker 13: part of those savings for themselves.
Speaker 1: Hey, Lucas, thanks so much for joining us. Appreciate listening
Speaker 1: to some of your thoughts there on the stocks that
Speaker 1: you guys own. Some pretty interesting names, some good performers.
Speaker 1: Lucas Tomickey. He's a founder and managing partner of LRT
Speaker 1: Capital Management. One of those folks is putting money to work. Who,
Speaker 1: as Tom Keen would say, has the courage to be
Speaker 1: in the market. SMP five hundred pretty much unchanged on
Speaker 1: the day nasdak off about three tenths of one percent,
Speaker 1: but at the index level, not a lot happening there,
Speaker 1: of course, a lot of movement under the surface there's
Speaker 1: company's report earnings for the next week or so. In
Speaker 1: size you're.
Speaker 6: Listening to the tape Cat's are live program Bloomberg Markets
Speaker 6: weekdays at ten am Eastern on Bloomberg Radio, the tune
Speaker 6: in app, Bloomberg dot Com, and the Bloomberg Business App.
Speaker 6: You can also listen live on Amazon Alexa from our
Speaker 6: flagship New York station, Just say Alexa play Bloomberg eleven thirty.
Speaker 2: Claudi Assam is the founder of Some Consulting. She is
Speaker 2: obviously a former Federal Reserve economist. We'd love to talk
Speaker 2: to her both here and on Bloomberg Surveillance. She is
Speaker 2: also the creator of the Sam Rule, which is a
Speaker 2: recession indicator, and a Dennison University graduate.
Speaker 1: So the Dutches, you guys, are the fight.
Speaker 2: I'm from Grandville, Ohio, so you know, for me, that's
Speaker 2: a big deal, and it's a Dennison fighting.
Speaker 5: They're the big read I think they read all.
Speaker 2: It's not really a sports thing, but more.
Speaker 9: Of a fun school.
Speaker 2: It was a fun school then it became a very
Speaker 2: serious school in the nineties when I was living there,
Speaker 2: although I did.
Speaker 5: See fish there which was pretty awesome.
Speaker 2: Claudia joins us to talk about the economy obviously, and
Speaker 2: not her college experience. And you also wear a column
Speaker 2: Claudia about Americans basically, you know, trying to answer the
Speaker 2: question that we're asking every day, which is why are
Speaker 2: the numbers so good? And Americans feel like the economy
Speaker 2: is so bad? You know, five percent GDP and yet
Speaker 2: everyone says a recessions around the corner, how's that going
Speaker 2: to happen?
Speaker 7: Right?
Speaker 12: And to be clear, there's a lot of reasons to
Speaker 12: be gloomy. Inflation is high, there's a lot of uncertainty.
Speaker 12: The question is why are the extra gloominess right? And
Speaker 12: things are as you said, there are a lot of
Speaker 12: good things. Unemployment is low, it's been low for almost
Speaker 12: two years, under four percent, Like that's really good. And
Speaker 12: if you ask people how's it going? What kind of
Speaker 12: news have you heard about? The economy is as bleak
Speaker 12: as when you go back to the nineteen seventies and
Speaker 12: early eighties. Right, it's very hard to say, oh, that
Speaker 12: totally makes sense. There's these bad things happening in the economy.
Speaker 12: Is that extra kick? And frankly, that's the piece we
Speaker 12: want to understand because it could really be telling us
Speaker 12: something bad is around the corner. People have been doing
Speaker 12: that for two years and then it's like, Okay, what
Speaker 12: else is going on here?
Speaker 2: Well, we can't underplay the importance of inflation to a
Speaker 2: normal American who is living paycheck to paycheck anyway. You know,
Speaker 2: economists love to look at core inflation measures, which take
Speaker 2: out all the stuff that we spend our paycheck on.
Speaker 2: Right food is expensive right now, cars are incredibly expensive.
Speaker 5: Plus financing has climbed.
Speaker 2: Houses are even not even you don't want to talk
Speaker 2: about because that's not even affordable if you can find one.
Speaker 2: So is that the main price problem that Americans have.
Speaker 12: Inflation has always been something that people would get riled up,
Speaker 12: but rightly so right and the price tags are legitimately
Speaker 12: higher and they're not coming down. What we've seen this
Speaker 12: year is it's slowing down. Inflation is coming down. That
Speaker 12: is a form of relief and that it could have
Speaker 12: been a lot worse. And there's lots of different pieces
Speaker 12: of good news that don't come up. We found out
Speaker 12: last week that household net worths for the typical family
Speaker 12: jump thirty seven percent pre pandemic to last year, and
Speaker 12: that was across income groups, demographic groups. You just saw
Speaker 12: these big increases, and that matters. Living paycheck to paycheck
Speaker 12: has been a problem in the US economy for decades.
Speaker 12: Many people have bigger paychecks, and there's a lot of
Speaker 12: people who have a little bit of a buffer that
Speaker 12: have never had it. So it's tough to see all
Speaker 12: those pieces come together and then have this absolutely bleak
Speaker 12: outlook for the economy.
Speaker 1: Well, Claudia, how much of it is the income inequality?
Speaker 1: Wealth inequality in this country where you know, the top
Speaker 1: ten percent are doing fine, actually better than fine, but
Speaker 1: the rest are really struggling with inflation, you know that
Speaker 1: that type of thing. How much is that to kind
Speaker 1: of account for it?
Speaker 12: This is the rarest of post recession periods in that
Speaker 12: we've seen often the bottom do better than they have
Speaker 12: coming out of any recession. I mean, the top's always
Speaker 12: going to be fine, right, Wealth inequality. Income inequality has
Speaker 12: been a problem in the United States for decades and decades.
Speaker 12: We actually saw some compression of that inequality, so it's
Speaker 12: shrinking some. I mean you can't hardly see it on
Speaker 12: the graph, right, it's it's you know, it's still big,
Speaker 12: So that inequality is out there. People tend to focus
Speaker 12: on what's in front of them, like what they need
Speaker 12: to do to put food on the table, roof over
Speaker 12: their head, and there are some service If you ask
Speaker 12: people about their own finances, they're more upbeat than when
Speaker 12: they look out at the economy. And so that's why
Speaker 12: in my I've written two pieces now at Bloomberg about
Speaker 12: this extra pessimism, trying to explore what it could be,
Speaker 12: and often it points to things that go beyond the economy,
Speaker 12: because we're asking people big picture about their outlook and
Speaker 12: there are other factors at play. We went through COVID
Speaker 12: and the war in Ukraine is ongoing. We've had so
Speaker 12: much bad news since the pandemic began, and then we
Speaker 12: do have features of how we transmit that bad news
Speaker 12: out into the public, and that's something that's different than
Speaker 12: the nineteen seventies.
Speaker 2: Yes, social media is what you're I assume what you're
Speaker 2: talking about here, and I think we all know now
Speaker 2: that the way for Elon Musk and Mark Zuckerberg to
Speaker 2: make money is for people to get angry and hateful
Speaker 2: on social media. That drives engagement and at the end
Speaker 2: of the day, the bottom line. So it kind of
Speaker 2: amplifies everything that's bad doesn't.
Speaker 12: It right, And we've always had the case that bad
Speaker 12: defense happen. The news comes out, it has a bias
Speaker 12: towards the bad. There's research news organizations, right, it's more
Speaker 12: negative that leads, it leads, right, So this is not new.
Speaker 12: But what happens is once it gets on platforms, social
Speaker 12: media platforms, it can spread far and wide and really fast.
Speaker 12: So it makes this bad news very personal because it
Speaker 12: can be conveyed by real people and not necessarily you know,
Speaker 12: print media or you know, on the TV. And it
Speaker 12: absolutely is the case that not only does negative spread faster,
Speaker 12: it gets absorbed fast. Like we're just there's a human
Speaker 12: tendency towards the negative. So it's like you put these
Speaker 12: three factors together, really bad events. News has a bias
Speaker 12: towards the negative. People love the negative, and then we
Speaker 12: can spread it really fast. So that's one way to
Speaker 12: think about it that you could get this extra kick.
Speaker 12: But absolutely we talked about a lot of economic factors
Speaker 12: that may not be captured and maybe different in the
Speaker 12: past that could be in there too. So it's really
Speaker 12: important to kind of pull this apart and figure out
Speaker 12: what's going on, because if people are really down beat,
Speaker 12: it can create a self fulfilling prophecy in that they
Speaker 12: pull back and they get more downbeat, and then before
Speaker 12: we know it, we're in a recession. So, like, this
Speaker 12: is an important question. People could be right. I mean,
Speaker 12: we could really be in a bad place in the
Speaker 12: next year or two.
Speaker 2: Well, and a lot of times when we get into
Speaker 2: a bad place, our leaders will hopefully come together and
Speaker 2: pull us out of it. And currently doesn't look like
Speaker 2: that's a possibility in this climate in Washington, with you know,
Speaker 2: the the lack of any kind of bipartisan In fact,
Speaker 2: you'll be thrown out a speaker of the House if
Speaker 2: you reach across the aisle.
Speaker 5: To make a deal.
Speaker 2: And deficits continue to climb. Now the latest, uh, the
Speaker 2: latest look is about two trillion dollars. Does that affect
Speaker 2: people's outlook? I mean they say that, you say they're
Speaker 2: doing well at home, but they're gloomy about the economy.
Speaker 2: Could it be because they see, you know, the USA
Speaker 2: government train kind of running off the tracks.
Speaker 12: They're in some of these sentiment surveys they ask people
Speaker 12: about government economic policy. It probably doesn't surprise anyone that
Speaker 12: the government scores pretty low and has for some time
Speaker 12: it's not clear to me that that's changed dramatically. You
Speaker 12: see it do move in like debt ceiling moments and
Speaker 12: the path like where people get more negative. It's more
Speaker 12: of that reality, like what happens if we were to
Speaker 12: go into a recession. Typically there's this saying we're all
Speaker 12: Knesians in a fox hole. So the money would go out,
Speaker 12: like the stimulus checks have gone out. But what's what
Speaker 12: would be problem is if it were a severe recession
Speaker 12: I mean we will hopefully never see anything like COVID again,
Speaker 12: is that it wouldn't last real long, and that ends
Speaker 12: up hurting people at the bottom the most right because
Speaker 12: they probably aren't recovered right away. So a government that
Speaker 12: doesn't have it all together will cause problems for people.
Speaker 12: Real people are going to suffer in the case of
Speaker 12: an economy going down.
Speaker 1: So where are you right now, Claude with with your
Speaker 1: economic outlook?
Speaker 12: It's tough. I wrote some on my substack last week,
Speaker 12: you know, really like we got to celebrate the winds here.
Speaker 12: We've saen inflation come down pretty notably, whether you're looking
Speaker 12: at core or.
Speaker 6: Yeah.
Speaker 12: I mean I tried to like, hey, there's some good
Speaker 12: stuff out here. Knowing that this wasn't going to amplify
Speaker 12: through social media. It's kind of hopeless. But there are
Speaker 12: plenty of dark clouds on the horizon. Interest rates are
Speaker 12: they've gone up a lot, and you are starting to
Speaker 12: see it. And when you ask businesses with their investment
Speaker 12: plans in some of the consumer credit quality measures, like
Speaker 12: the delinquencies they fell during after the pandemic, because again,
Speaker 12: we gave people so much relief, they're moving up and
Speaker 12: we could be moving back to quote unquote normal or
Speaker 12: there's just a certain level or this could be a
Speaker 12: sign that it's getting like people are in a more
Speaker 12: precarious place. And yet, like we've been kind of saying
Speaker 12: that at different times over the last two years. Right,
Speaker 12: the recession is always coming and it will someday, Like
Speaker 12: we don't escape these over the long term, but it's
Speaker 12: things have been better than we thought or people were
Speaker 12: saying or businesses were saying, so we we could still
Speaker 12: balance it out, moderate some things and keep going. But
Speaker 12: it's not it's not what should happen, right, What should
Speaker 12: happen is that we go into a recession. That's not
Speaker 12: my base case, but I know that's the reality of
Speaker 12: everything that's lined.
Speaker 1: Up all right, Claudia, Thanks so much, Je for joining us.
Speaker 1: I just appreciate getting a few minutes of your time, Claudia,
Speaker 1: Sam founder and independent economists at some consulting.
Speaker 2: Thanks for listening to the Bloomberg Markets podcast. You can
Speaker 2: subscribe and listen to interviews at Apple Podcasts or whatever
Speaker 2: podcast platform you prefer. I'm Matt Miller. I'm on Twitter
Speaker 2: at Matt Miller nineteen seventy three.
Speaker 9: And I'm fall Sweeney.
Speaker 1: I'm on Twitter at pt Sweeney. Before the podcast, you
Speaker 1: can always catch us worldwide at Bloomberg Radio.