Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amerie Hordernt. Join us each day
Speaker 2: for insight from the best in markets, economics, and geopolitics
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Speaker 2: Terminal and the Bloomberg Business App. Rick Reader is black
Speaker 2: Rocks CIO of Global Fixed Thing Come, and it's widely
Speaker 2: considered to be one of five contenders to replace fed
Speaker 2: share Jay Powell. He writes, the following moving interest rates
Speaker 2: lower is very much in line with what we do
Speaker 2: know today, which is that the labor market is clearly
Speaker 2: slowing to the point of potential store speed. Rick joins
Speaker 2: us now for more. Rick and Monick, thanks thanks for
Speaker 2: having us. Good to see my friend, it's been too long.
Speaker 1: Thank you.
Speaker 2: Welcome to the studio. We've got a labor market problem.
Speaker 3: I don't and by the way, I don't think it's
Speaker 3: a cyclical phenomenon. I think there is the way at least,
Speaker 3: I think we have a productivity revolution that is pretty extraordinary,
Speaker 3: and people point to AI as an exclusive driver of that.
Speaker 3: If you look across what companies are doing, including second
Speaker 3: quarter earnings, their quarter earnings, if you only dynamic around
Speaker 3: around how do you think about logistics, freight management, predictive maintenance,
Speaker 3: customer procurement, companies are doing more with less. And I
Speaker 3: think that is a secular dynamic that's going to be
Speaker 3: with us for a couple of years now. I think,
Speaker 3: I mean, we can talk about there's a bit of
Speaker 3: elevated inflation because of terras, but I think we're going
Speaker 3: to be dealing with something. By the way, you also
Speaker 3: put robotics, automation. You know, this to me is a
Speaker 3: structural dynamic. I think full employment will be the challenge
Speaker 3: for the next couple of years.
Speaker 2: So we mentioned the spread between Ernie's growth fantastic, employment
Speaker 2: growth terrible. How are we closing that gap? If ever?
Speaker 3: So, I think, by the way, I actually think that's
Speaker 3: not a coincident.
Speaker 1: Those aren't coincident factors.
Speaker 3: What's happening is companies literally the top line revenu is
Speaker 3: pretty good generally. But what's happening is they're cutting costs
Speaker 3: of good soul, they're cutting their SGNA costs, they're reducing
Speaker 3: their cost infrastructure. By the way, AI is a technology,
Speaker 3: there's historically been this dynamic of when you have new technology,
Speaker 3: it moves people into other higher value jobs. And this technology,
Speaker 3: by the way, I put robotics and automation on top
Speaker 3: of that, autonomous driving, et cetera, is literally designed to
Speaker 3: replace human input.
Speaker 1: You have a dynamic that is pretty extraordinary that I think.
Speaker 3: You know, if you know, as at central banker or
Speaker 3: whatever is, you think about being anticipatory of where the
Speaker 3: world is going. That is where the world is going,
Speaker 3: and I think that is a challenge. Economy is doing fine,
Speaker 3: divergent and quite frankly only operating on a couple of cylinders,
Speaker 3: huge capex which we talk about from cloud, from infrastructure,
Speaker 3: from power. And you've got higher income wealthy savers they're
Speaker 3: doing great and supporting consumption in the economy. And then
Speaker 3: you have the part of the economy that's interest rates
Speaker 3: sensitive that's really struggling. And that's part of why I
Speaker 3: think the interest rate tool needs to address low income
Speaker 3: small business housing and that that's where I think you
Speaker 3: square the circle.
Speaker 2: So we've got to talk about this from two perspectives,
Speaker 2: one as a policy maker, the other as an investor,
Speaker 2: and one of course informs the other. Let's just sit
Speaker 2: on policy for a moment. You're talking about maybe the
Speaker 2: needs cut interest rates, but also the fact that some
Speaker 2: of the pullback we're sent in hiring is not cyclical.
Speaker 2: How can we address one with lower interest rates? Just
Speaker 2: explore that for us a little bit.
Speaker 3: Yeah, So, first of all, if you came down from
Speaker 3: Mars and said, okay, so I've got five year inflation
Speaker 3: break even, so trade in the market, you buy as
Speaker 3: many as you want a two point three five percent
Speaker 3: and you said okay, now set the price, and you said, okay,
Speaker 3: two point three five percent inflation, and I clearly have
Speaker 3: a slowing labor market, you would say, gosh, I don't
Speaker 3: know if I set the rate at three, and then
Speaker 3: I talked about okay, so now what's equilibrium on the
Speaker 3: mortgage rate to create velocity in housing? And they're directly
Speaker 3: related to what you said. Housing today is three quarters
Speaker 3: of the wealth by people in the countries in housing.
Speaker 3: We have a housing market that you know, you look
Speaker 3: at the earnings into your horton you look at Leonar
Speaker 3: By the way, I just saw an ISI builder survey
Speaker 3: that show the softness. If you actually get the mortgage
Speaker 3: rate down a bit, then what happens is all of
Speaker 3: a sudden you get housing velocity. WHI is housing velocity
Speaker 3: important because you get labor mobility today you can't move,
Speaker 3: you lose your job.
Speaker 1: You got to go somewhere else, you can't move.
Speaker 3: Secondly, and I've set up before, for every home built
Speaker 3: in this country, we hire three point one people. It's
Speaker 3: pretty hard to ai building a house. So if you
Speaker 3: can get some real estate velocity. And by the way,
Speaker 3: it's a young people who are struggling today, young people
Speaker 3: who aren't savers, who are borrowers, that's the way they
Speaker 3: build wealth. That's the way you put people to work.
Speaker 3: And so I think it is all a related concept.
Speaker 3: Point being is by the way, I mean, if we
Speaker 3: had to raise interest rates to where they were, but
Speaker 3: if you said to me today, what's equilibrium, I don't
Speaker 3: think it's where we sit today in the funds, right.
Speaker 4: So how willing are you to allow or how willing
Speaker 4: would you be to allow inflation to run above that?
Speaker 4: Two percent target in order to run the economy hot
Speaker 4: to allow for more job creation.
Speaker 1: Listen, it's a great question. I think. Every time you
Speaker 1: think about these things, and I think about the same thing,
Speaker 1: we take.
Speaker 3: Risk, you sort of think about what are the quadrants
Speaker 3: of risk?
Speaker 1: What are you willing to underwrite?
Speaker 3: So today, when I think about those quadrants, if you
Speaker 3: were willing to take some labor and some overall inflation thing,
Speaker 3: you think about, Okay, what are the sticky drivers of
Speaker 3: inflation today? Healthcare, education, insurance. It's pretty hard use the
Speaker 3: interest rate tool to get insurance costs down. It's pretty
Speaker 3: hard to get healthcare, so the tool is not that robust.
Speaker 3: And shelter is a sticky part of inflation that if
Speaker 3: I actually get the rate down, I actually mitigate some.
Speaker 1: Of that elevator. I'll mitigate the rental inflation.
Speaker 3: So you know out there on one other thing, five
Speaker 3: year inflation expectations are two point three five percent if
Speaker 3: you were at two and three quarters. And by the way,
Speaker 3: core PCEE the six month moving average core PC is
Speaker 3: two point five. Let's say we're probably closer to three.
Speaker 3: If you take the whole full construct of inflation. Three
Speaker 3: is not an infectious. You know, you clearly don't see
Speaker 3: it in terms of where people anticipate in If you're
Speaker 3: running four or five, then I'd say, gosh. Or if
Speaker 3: the three was trending higher on things and that the
Speaker 3: interest rate tool impacted, then I think you'd have to
Speaker 3: address that just to sort of.
Speaker 4: Build on that this idea that three is okay, but
Speaker 4: above that maybe not so much. There's a feeler that
Speaker 4: there is an asymmetry in the timeframe of AI that
Speaker 4: right now the buildout is going to be inflationary because
Speaker 4: of the inflationary inputs of commodity costs, of just how
Speaker 4: much lending and money this is generating on a broad scale.
Speaker 4: The productivity gains that will cause disinflation will take a
Speaker 4: lot longer to come into play. So how if you
Speaker 4: were the head of the FED would you handle that?
Speaker 1: So I take up morning.
Speaker 3: So think about historically the way the interest rate tool worked.
Speaker 3: It was a modulator of capacs. So you think about it,
Speaker 3: go back sixties and seventies. The big spenders in manufacturing today.
Speaker 3: My guess is OPENII and Vidia, Google, et cetera. It's
Speaker 3: not the interest rate tool that is affecting CAPAX. They
Speaker 3: are going to put that capex in because there is
Speaker 3: a long run benefit for doing it, meaning the interest
Speaker 3: rate tool doesn't really do a lot.
Speaker 1: So I think, at the end of the day.
Speaker 3: Does that create a little bit of inflation in the
Speaker 3: areas you describe? I think so, But I think you
Speaker 3: have to say, you know where are we going? And
Speaker 3: I always say, being an investor for a long time,
Speaker 3: you know the concept of data dependence. If you are
Speaker 3: constantly in the rear view mirror trying to figure out
Speaker 3: how would you invest is probably the wrong way to
Speaker 3: do it. We are going through something that's very different.
Speaker 3: We now are in a capex cycle. And then if
Speaker 3: you break down the economy and say, okay, what is
Speaker 3: driving GDP today. That's what's driving this capex and some
Speaker 3: consumption from hire income people.
Speaker 2: The key pace of the inflation story. Shouter, you touched
Speaker 2: on it. You said something interesting. Interest rates down, shout,
Speaker 2: costs down. Just explain that for us.
Speaker 3: Yeah, so, I mean we have an inventory problem in
Speaker 3: the country. And by the way, I mean look at
Speaker 3: every piece of data, it shows the same thing. And so,
Speaker 3: by the way, when the mortgage rate has come down
Speaker 3: a bit post this recent fed drop in interest rates,
Speaker 3: all of a sudden you're seeing an existing home sales pickup.
Speaker 3: So we just saw the prepayment report for mortgages, and
Speaker 3: all of a sudden you're seeing some acceleration, meaning you
Speaker 3: don't have to get the interest rate tool down that much.
Speaker 3: If you got the mortgage rate into the fives I'd
Speaker 3: say mid to high fives, you would see some velocity
Speaker 3: of housing. If you saw velocity of housing today, I
Speaker 3: saw on deor Horton's numbers. They talked about they're doing
Speaker 3: one percent first year mortgage and then I think it's
Speaker 3: four point nine because they've got to subsidize the mortgage. Well,
Speaker 3: what if der Horton didn't have to do that, and
Speaker 3: what if the actual organically the rate was lower, they'd
Speaker 3: build more houses. You create more inventory, You create more inventory,
Speaker 3: you take the pressure off of rental rates, and you
Speaker 3: start to bring inflation down. Plus the labor mobility that
Speaker 3: is not an insignificant part of that.
Speaker 2: Do you think the FED needs to think how sound
Speaker 2: of the box beyond just interest rates? Is this something
Speaker 2: else we can do? Hey?
Speaker 3: Yeah, I mean listen, I think there is. I think
Speaker 3: the FAT has a series of tools. The interest rate tool,
Speaker 3: by the way today, nobody really borrows off the overnight
Speaker 3: funding rate, the interest rate tool it used to be.
Speaker 3: They think about how banks borrow a short they lent long.
Speaker 3: Think we had a very different dynamic today the way
Speaker 3: we tranch the debt in the economy. Think about how
Speaker 3: we finance RESI, commercial asset box, credit cards, auto loans.
Speaker 3: It's trunched. The front end of the yield curve doesn't
Speaker 3: really do a lot. How you think about you know,
Speaker 3: where is the ten year point? How do you think
Speaker 3: about your balance sheet? How do you think about all
Speaker 3: the other tools that are at your disposal, I think
Speaker 3: are really important. Plus you got to think about what
Speaker 3: is the effect of the currency etc.
Speaker 1: Relative to that.
Speaker 3: So anyway, I think the construct is much more complex
Speaker 3: and much more quite frankly, you have a lot of
Speaker 3: tools that create much more effectiveness. Then we're just going
Speaker 3: to move the overnight funds right every six weeks.
Speaker 1: Like the balance sheet.
Speaker 4: How much would you be open to see the Fed
Speaker 4: use the balance sheet a little bit more?
Speaker 1: So?
Speaker 3: I think the construct of the balance sheet is important.
Speaker 3: So I think people don't realize there's a notional dynamic,
Speaker 3: and there's a DVO one, there's a duration dynamic further
Speaker 3: out the yield curve. I am sympathetic to should we
Speaker 3: keep the balance sheet around the same level, but you
Speaker 3: could be really effective. So today the US Treasury eighty
Speaker 3: nine percent of what the US Treasury finances is at
Speaker 3: the zero to two year point eighty And think about
Speaker 3: if you're a company, would you ever finance in the
Speaker 3: one year.
Speaker 1: It's crazy, but that's where we are today, and it
Speaker 1: is what it is. So there's not that much float.
Speaker 3: Actually, longer on the curve, there's reason why people put
Speaker 3: on steepeners. I think get squeezed out of steepeners because
Speaker 3: there's not that much float. You don't have to use
Speaker 3: that much balance sheet. But if you thought about, gosh,
Speaker 3: the construct of the balance sheet, if we used more
Speaker 3: of it further out the curve, we let runoff happen
Speaker 3: on the front. If you can keep the stability of
Speaker 3: the back end. So if you can keep the tenure,
Speaker 3: you know, we got to the tenure was three ninety.
Speaker 3: If the tenure was three and a half to four
Speaker 3: stable and rate vault, rate volatility came down all of
Speaker 3: a sudden, you'd see mortgage spreads.
Speaker 1: Could come in.
Speaker 3: Then you'd get and by the way, deregulation the banking system,
Speaker 3: then you get mortgage velocity moving. So, by the way,
Speaker 3: I don't think we're that far away. And by the way,
Speaker 3: you know this concept that you have to get the
Speaker 3: rate down hundreds of basis points.
Speaker 1: I just think we're not that far away. Just get
Speaker 1: it there and.
Speaker 3: Keep volatility of the rate market at a stable level,
Speaker 3: and then you'll see a system that will operate pretty well.
Speaker 2: Going back to the late eighties, how much fun you
Speaker 2: have in right now?
Speaker 3: I mean, I mean I said before, this is the
Speaker 3: best investment environment I've ever seen. I mean not because
Speaker 3: stocks are going to go straight up. I mean you
Speaker 3: have diversions that is great for investing. You have technology
Speaker 3: that's changing, and so the ability to look at tech stocks, healthcare, tech,
Speaker 3: to look.
Speaker 1: At you know, where some of the financials. How you
Speaker 1: create velocity in the system.
Speaker 3: And then you know the earlier conversation and we were
Speaker 3: talking about the break like now at the income levels.
Speaker 3: As long as this interest rate stays here, you know
Speaker 3: what's ironic as commercially, you know, I prefer the interest
Speaker 3: rate to stay here because it's I mean, this is
Speaker 3: pretty good. We can create portfolios, we run the CTF
Speaker 3: called BINK and you know, creating six six in a quarter,
Speaker 3: we're running almost six thirty. Now you don't have to
Speaker 3: take a lot of risk, you don't have to go
Speaker 3: out the yield curve. That's pretty good. So anyway, I think,
Speaker 3: and by the way, the options market, I think the
Speaker 3: best opportunities are in the options market rate options, equity options,
Speaker 3: and you could manage your CONVEXI so you can be
Speaker 3: long equities and then buy a lot of you can
Speaker 3: overwrite your single name stocks, you can buy downs. It's
Speaker 3: a fun environment.
Speaker 2: Well, leslen into BINK. You mentioned here the ices, flexple
Speaker 2: active income ETF. What kind of things have you been
Speaker 2: doing over the past six months.
Speaker 3: You know we've been you know, the cool thing about
Speaker 3: being active is you can move around because the regime shifts.
Speaker 3: And while I was describing earlier, like where do you
Speaker 3: think the interest rate should be? The true interestrates an't
Speaker 3: going to move very far. So you know we're keeping
Speaker 3: our interest rate duration. You know, in and around four
Speaker 3: years we've moved a little bit out of the very
Speaker 3: front end because it's pricing a lot now in terms
Speaker 3: of where this FED is going to go. Then we've
Speaker 3: done we've shifted some of our credit into mortgages quite frankly,
Speaker 3: if you believe rate volatility is going to be down,
Speaker 3: mortgage has become interesting, and credit spreads have gotten pretty tight,
Speaker 3: particularly us investern grade has gotten pretty tight, so we've
Speaker 3: rotated out of that. We've bought a little bit of
Speaker 3: EM recently, I would say recently over the last six months.
Speaker 1: We haven't bought a YM in a long time.
Speaker 3: You know, if you believe the dollar is contained, EM
Speaker 3: becomes pretty interesting and the yields, you know, relative to
Speaker 3: high yield, the yields and EM are attractive.
Speaker 1: So we've cut a little bit of high yield.
Speaker 3: We've got a good amount of investment grade credit, and
Speaker 3: we've rotated. So today I think our average rating is AS,
Speaker 3: which is pretty good. So it gives us a little
Speaker 3: bit of room to do some things.
Speaker 4: Like you said something that was interesting there, which is
Speaker 4: you don't have to go very far out the risk
Speaker 4: curve in order to get income now because yields are high.
Speaker 4: If the FED were to cut rates, does that make
Speaker 4: you more inclined to take more risk?
Speaker 3: Yeah, I mean I have to say, you know, for
Speaker 3: two decades, part of why I'm so excited about where
Speaker 3: we are today. For two decades, it was like I
Speaker 3: got to buy high yield at three and a half
Speaker 3: and four and it doesn't feel natural. But now if
Speaker 3: you have the risk free rate, particularly in the front
Speaker 3: end here, gosh, I put a little bit of spread
Speaker 3: on it. Now I get what is ample yield. With
Speaker 3: default rates that are not that elevated. You are seeing
Speaker 3: some bubbling defaults in a couple of places.
Speaker 1: So you know, I think the thing.
Speaker 3: That we would do is, you know, I know what
Speaker 3: we would do is if rates come down. You know,
Speaker 3: I'm not a believer, and this is what blows you up.
Speaker 3: I'm not a Believer's gosh, I I got to keep
Speaker 3: that yield. I gotta get my risk up. You just
Speaker 3: have to absorb it and say, you know what, I'm
Speaker 3: going to run at run six twenty five or so.
Speaker 3: I'm going to run five and three quarters of six.
Speaker 3: But you know what will happen is the cash rate
Speaker 3: will come down and people say, gosh, you know what,
Speaker 3: cash is only getting me two and a.
Speaker 1: Half to three.
Speaker 3: That's any you know, inflation, even if inflation's three like,
Speaker 3: it's still pretty great.
Speaker 4: Very few people on Wall Street they are saying, you
Speaker 4: know what, I can just live with less income.
Speaker 1: It's okay, I won't stretch too far. I'll be disciplined and.
Speaker 4: Maybe I'll just take less cash and I'll commit.
Speaker 2: To the economy.
Speaker 4: At what point can you imagine that things start to
Speaker 4: get a bit excessive, especially given the fact that there
Speaker 4: is a lot of cash right now looking for a home.
Speaker 3: So, by the way, it's a funny thing is you
Speaker 3: say that, you know, we live in a competitive environment.
Speaker 1: We can't just sit back. I mean, it is a
Speaker 1: tough business.
Speaker 3: We have competitors and people that are out there say, gosh,
Speaker 3: I can get you more yield, and listen. I think
Speaker 3: one of the things you have to do is you
Speaker 3: have to keep your volatility as long as you always
Speaker 3: think about what's your yield per unit of volatility? Today equities,
Speaker 3: I think equities are are still going up fifteen to
Speaker 3: twenty percent from where they are over the next year.
Speaker 3: So I'm just trying to keep our volatility at a reasonable place.
Speaker 3: What is excessive? You know, there's some things that are
Speaker 3: bubbling in the markets that are mostly in privates that.
Speaker 1: Are gosh, I don't I don't get any cash.
Speaker 3: Flow for two or three years. What's the multiple you
Speaker 3: put on that? Like that stuff is hard. There are
Speaker 3: some really good business models, you say, I see it
Speaker 3: and it's almost definitional, you know. You see some parts
Speaker 3: of it where people are stretched and in some of
Speaker 3: the credit markets where some of the levels get aggressive.
Speaker 3: Part of why we've rotated some of the investment preate.
Speaker 3: It doesn't do that much for us anymore at those
Speaker 3: spread levels. But I don't, you know, I don't see
Speaker 3: like you saw before the financial crisis, excessive low you know,
Speaker 3: low covenant or easy covenants, high LTV financing.
Speaker 1: I don't.
Speaker 3: I don't see that yet today at the around the
Speaker 3: edges a little bit, but not not really.
Speaker 2: Fifteen to twenty percent on stocks now the double digit Yeah.
Speaker 1: You know, I don't. I think.
Speaker 3: I mean, I think we're living through history because if
Speaker 3: we're what you asked about before, because productivity and roe
Speaker 3: is so spectacular. And by the way, I don't think
Speaker 3: it's five hundred stocks. I think it's by the way
Speaker 3: we were stat yesterday, if you take the S and
Speaker 3: P fifteen hundred, it's is this right that I heard
Speaker 3: it was twenty two percent off the highs. I thought
Speaker 3: that number of rust constrat to work with Dougleman that
Speaker 3: I thought that was extraordinary. If you take the highest
Speaker 3: ROE businesses, you know, let's say it's thirty stocks, fifty stocks, tech, healthcare,
Speaker 3: attach some of the financials. They're doing really well. They
Speaker 3: throw off a lot of earnings. They're roe is high,
Speaker 3: and they buy back huge amounts of stock. You know,
Speaker 3: small cap don't really know, but there's enough stocks with
Speaker 3: enough market cap that I think will get you that
Speaker 3: sort of return.
Speaker 2: Stay with market weight on the sm P five hundred. No,
Speaker 2: it's the concentration.
Speaker 1: I mean, we're long.
Speaker 3: I mean we're you know, we're you know, we've reduced
Speaker 3: a little bit of beta. When when equity volatility picks up,
Speaker 3: I have to bring my beta down a little bit,
Speaker 3: but I'm still running long. And you know, days like yesterday,
Speaker 3: you know, and you know single name you know, we
Speaker 3: get these earnings reports and single name vault is high
Speaker 3: because you know, if company does own hit these excessive numbers,
Speaker 3: they hit the stock. Yeah, so you can still do
Speaker 3: some things to protect some downside. And by the way,
Speaker 3: interest rates, if you believe the FED is moving orbeit deliberately,
Speaker 3: interest rates actually act as a reasonable hedge. Again, so
Speaker 3: there's some correlation or rate that's allowing us to run
Speaker 3: a moderate.
Speaker 2: Rom Stay with us. More Bloomberg surveillance coming up after this.
Speaker 2: Here's the view of Sarah House of Wells Fargo. Right
Speaker 2: in the absence of broad based layoffs suggests that jobs
Speaker 2: market is holding together even if the risk of a
Speaker 2: more meaningful slowdown cannot be ruled out. Sarah joined us
Speaker 2: now for more. Sarah, welcome to the show. Just to
Speaker 2: pick upon those headlines from the Treasury secretary. If we
Speaker 2: start seeing two thousand dollars tax rebates, if we see
Speaker 2: significant relief early next year, how would that change your routelook?
Speaker 5: Yeah, so I think already we're looking for a pick
Speaker 5: up next year just because you have some pretty favorable
Speaker 5: tax policy coming out where consumers are going to get
Speaker 5: pretty big refunds come the early part of the year,
Speaker 5: and so if you add two thousand dollars rebate checks
Speaker 5: on top of that, I think you would get a
Speaker 5: meaningful pickup in spending through the first few months of
Speaker 5: the year that could help, I think balance out. I
Speaker 5: think more of the components of GDP that we're seeing
Speaker 5: where maybe it's at least temporarily a broader based increase
Speaker 5: in overall consumption rather than one that's being driven more
Speaker 5: by your asset owning higher income household.
Speaker 4: Sarah, we saw a taste of this, and I know
Speaker 4: it's not the same thing, but during the pandemic era
Speaker 4: checks that people got, and a lot of people attribute
Speaker 4: the inflation that we saw in the pandemic era to
Speaker 4: some of those particular checks. Do you think that there'll
Speaker 4: be a similar dynamic or do you think these are
Speaker 4: too small and not regular enough.
Speaker 5: To have that kind of transmission mechanism. Well, I think
Speaker 5: there are a couple important differences there. So yes, if
Speaker 5: you're injecting cash directly into households, especially your lower income households,
Speaker 5: they're going to go and turn around and spend that.
Speaker 5: But there's other sides of this that that are different,
Speaker 5: So you don't have the same degree of supply constraints.
Speaker 5: You don't have. I think the labor supply issues that
Speaker 5: we had at that time, where it wasn't just the
Speaker 5: increase in demand that I think led to the pandemic
Speaker 5: air inflation, but it was some pretty unique supply factor.
Speaker 5: So I think overall rebate checks, even the larger tax
Speaker 5: refunds that we're expecting. I think that's going to make
Speaker 5: it harder for inflation to continue to grind lower. But
Speaker 5: I don't think that it would be something that would
Speaker 5: necessarily respark ained a sustained pickup in inflation. Again, I
Speaker 5: think it would just more derail the path, or at
Speaker 5: least a slow the path of disinflation that's set for
Speaker 5: the second half of next year.
Speaker 4: Sarah, the implication here is faster growth, potentially an expanded's
Speaker 4: fiscal deficit in order to finance a lot of the
Speaker 4: programs that are being proposed likely will be proposed heading
Speaker 4: into the midterms, not just by one party, Frankly, both
Speaker 4: parties talking about similar types of responses. How are you
Speaker 4: factoring that in your economic look at a time where
Speaker 4: there already have been some concerns raised about the US
Speaker 4: fiscal trajectory.
Speaker 5: Right, So, I think, again, if we're talking about one
Speaker 5: off checks, this is only a temporary boost, So this
Speaker 5: is not something that's going to be fundamentally sustaining the
Speaker 5: outlook for the consumer. And to the extent that it
Speaker 5: does increase the deficit, then you're going to be seeing
Speaker 5: some of that feedback into yields, which is also going
Speaker 5: to flow through to other things, so potentially mortgage rates,
Speaker 5: and so it's not a panacea for I think really
Speaker 5: reviving anot the sluggish pace of growth that we think
Speaker 5: we're hitting here in the fourth quarter, maybe in some
Speaker 5: of the early parts of the first quarter, given that
Speaker 5: there are going to be some feedback sides of this,
Speaker 5: and in terms of what happens with borrowing.
Speaker 2: Costs, Sarah, what should anchor our view of the labor
Speaker 2: market right now? I think that's the question of the
Speaker 2: year for the labor market. Employment growth is super low,
Speaker 2: the unemployment rate is also low as well. Do you
Speaker 2: think the employment growth maybe overstates the weakness or does
Speaker 2: the unemployment rate overstate the strength?
Speaker 5: Yeah, so I think the hiring rate, I think it
Speaker 5: does overstate the weakness, given that some of this is supply.
Speaker 5: But I think we can't chalk it all up to
Speaker 5: the immigration story, for example, or just the ongoing population
Speaker 5: aging where we are seeing demand continue to weakend. So
Speaker 5: look at indeed postings, look at the pmis, whether it's
Speaker 5: the ISMS or the FED still showing employment in contraction
Speaker 5: in contraction territory, and so I think there still is
Speaker 5: a demand problem here, and I think even if that
Speaker 5: break even rate is lower, that still portends something for
Speaker 5: what's happening with household income and therefore spending power. But
Speaker 5: when we step back, and I think that main point
Speaker 5: that we need to keep in mind it is where
Speaker 5: we are in terms of that overall balance. That's what
Speaker 5: the FED is looking at, and I think there we
Speaker 5: are seeing some softening, but not in a material or
Speaker 5: quick way. So it's just this gradual, ongoing softening that's
Speaker 5: keeping the FED on edge, but not definitive in terms
Speaker 5: of the labor market really being in trouble here.
Speaker 2: Sarah, what is your best guess for the federalserve on December.
Speaker 5: Tenth, So we still have that they'll cut another twenty
Speaker 5: five basis points, So obviously that's a close call where
Speaker 5: it doesn't look like we're going to get even the
Speaker 5: November data that we usually would have had with the
Speaker 5: shutdown ending. I think the CPI we're not going to
Speaker 5: have that for November, so it's going to be a
Speaker 5: close call of whether you get November employment. But I
Speaker 5: think the overall position of look, we need to move
Speaker 5: closer to neutral inflation. Yes, it's being temporarily held up
Speaker 5: by tariffs, but you're not seeing that spillover into services
Speaker 5: path there is still lower I think that still supports
Speaker 5: the argument of moving towards neutral. And I think when
Speaker 5: you look at the voter composition too, that some of
Speaker 5: the more outspoken hawks are the people who have come
Speaker 5: out and said, look, I'm having trouble supporting another cut.
Speaker 5: They're not voter. So I think when push comes to shove,
Speaker 5: we'll get that additional twenty five basis point cuts in December.
Speaker 2: Stay with us, multiple impex Savidans coming up off to
Speaker 2: this big question for all of us tracking the markets,
Speaker 2: when do we get the economic data? The National Economic
Speaker 2: Council Director Kevin has had this to send the last
Speaker 2: twenty four hours. I've been told that some of the
Speaker 2: surveys were never actually completed, so will never perhaps even
Speaker 2: though what happened in that month. What does that tell
Speaker 2: to you abound the October data that.
Speaker 4: We're not getting CPI period full stop. I mean, or
Speaker 4: if we do, it's going to be so muddy that
Speaker 4: people are going to really struggle to understand what exactly.
Speaker 1: It looks like.
Speaker 4: We are going to get September jobs report that probably
Speaker 4: will be number one possibly early next week after that
Speaker 4: kind of a pot shot, whether it's retail sales, whether
Speaker 4: it's other peripheral data points to indicate inflation. But right
Speaker 4: now it seems like we're kind of going to be
Speaker 4: in that fog for maybe forever. When it comes to
Speaker 4: that one month period.
Speaker 2: It's not going to be fun for the next few months.
Speaker 2: John Labor, if you're as your group joined us now
Speaker 2: for more, John, welcome to the program. What's your understanding
Speaker 2: of the data we will get and won't get in
Speaker 2: the coming weeks.
Speaker 6: Well, the BLS and the BA are still shutdown, so
Speaker 6: we don't know exactly what their plans are. I'd expect
Speaker 6: to probably announce something by the end of this week
Speaker 6: or maybe Monday of next week. A timeline for when
Speaker 6: they will get these reports out some of them. They
Speaker 6: can collect the data. November is looking dicey right now
Speaker 6: because this is the reference week for payrolls. They could
Speaker 6: always push that back a week and collect the data
Speaker 6: next week and then release the November data a week
Speaker 6: later in December. That's what they've done in previous shutdowns.
Speaker 6: But we really have no precedent for anything like what
Speaker 6: we've seen here in the twenty eighteen shutdown, the government
Speaker 6: was partially funded, so data releases weren't disrupted, And in
Speaker 6: twenty thirteen, which is the closest analog, you had a
Speaker 6: two week delay and then you had some delay in
Speaker 6: other some of these reports coming out. I do think
Speaker 6: it's right we'll just never know some of the things
Speaker 6: from October. The employer survey, we probably can get some
Speaker 6: pieces of that from October. But the household survey, I
Speaker 6: think they probably just won't release anything and we'll be
Speaker 6: flying blind on that month.
Speaker 2: John gave us a reality check. Come in New York,
Speaker 2: we come a financial markets. Obviously there's a home bus.
Speaker 2: So we think this is really really important. Even on
Speaker 2: the radar of people down at Washington d C.
Speaker 6: No, this is not an issue that's come up, I
Speaker 6: think in any of the shutdown discussions.
Speaker 7: It's a distraction.
Speaker 6: This is about Democrats wanted to reign in the Trump administration.
Speaker 6: It's about healthcare costs, it's about a whole bunch of
Speaker 6: other things except data. I mean, these are kind of
Speaker 6: would be in Washington, would be considered extremely wonky issues,
Speaker 6: and nobody on Capitol Hill is walking out about this stuff.
Speaker 4: Yeah, but there is a larger takeaway here, John and
Speaker 4: I was looking at the history of government shutdowns. There've
Speaker 4: been six since nineteen ninety. They're getting progressively longer. They
Speaker 4: were two to three days under Ronald Reagan and George W. Bush.
Speaker 4: Under President Clinton, it was as much as twenty one
Speaker 4: days under President Obama, sixteen days under President from one
Speaker 4: point oh thirty five days, and now here we are
Speaker 4: at forty two plus days. I'm just wondering what this
Speaker 4: means about Congress's ability to get anything done and whether
Speaker 4: January thirtieth is the next D Day where we're going
Speaker 4: to get another government shutdown.
Speaker 6: Yeah. I mean, I think you've hit the nail on
Speaker 6: the head here. The federal budget process is fundamentally broken.
Speaker 6: It's been broken for probably a decade now. And as
Speaker 6: it kind of creaks and cracks and Washington becomes more
Speaker 6: partisan and things become harder to do, I think the
Speaker 6: brokenness of the federal budget system becomes more obvious and
Speaker 6: starts having real world consequences. Congress hasn't completed the appropriation
Speaker 6: cycle on time in years. The idea of even doing
Speaker 6: a budget for reasons other than doing a reconciliation bill
Speaker 6: is basically laughable, And I think what you're going to
Speaker 6: see is increased likelihood of shutdowns. Now in the past,
Speaker 6: what we've seen is that nobody really wins from a shutdown.
Speaker 6: Members come out of that saying gosh, I don't want
Speaker 6: to do that again. I'm not sure that's what you're
Speaker 6: going to see this time around, given how long everything
Speaker 6: functioned just fine under the shutdown government. I mean, a
Speaker 6: huge portion of federal workers were considered essential meeting. They
Speaker 6: could do their jobs but not get paid. And it
Speaker 6: wasn't until flight delays really started kicking in and you
Speaker 6: had this issue with snap benefits that people started to
Speaker 6: really feel the real world pain. But I think that
Speaker 6: one of the lessons of this shutdown is that a
Speaker 6: week or two or longer shutting down the government really
Speaker 6: isn't that big of a deal. President Trump can fly
Speaker 6: around the globe making peace deals, tearing down the East Wing,
Speaker 6: and it doesn't affect people's lives until you get much
Speaker 6: deeper into the shutdown.
Speaker 4: Yeah, but John, to John's point earlier when he was
Speaker 4: talking about the fact that we may not get this
Speaker 4: data ever, in terms of data that was not collected
Speaker 4: during the reference period, Greg Daco over at ey Parthenon
Speaker 4: said that about twenty percent of the economic hit from
Speaker 4: the government shutdown probably will be permanent, just simply because
Speaker 4: there is sort of this lost activity economic activity. I'm
Speaker 4: just wondering, does this change the landscape for investors, for
Speaker 4: corporations trying to maneuver in a world that is affected
Speaker 4: by a government shutdown, even if most people don't feel it.
Speaker 6: I think that if you're thinking about the future and
Speaker 6: thinking about possibilities of what the future is going to
Speaker 6: look like, you've got to have a much wider range
Speaker 6: of outcomes on your radar and prepare for those outcomes.
Speaker 6: You could have an even longer government shutdown in January.
Speaker 6: There could be no government shutdown in January. You could
Speaker 6: have the Democrats take back the House next year, and
Speaker 6: then you get an even longer shutdown coming in twenty
Speaker 6: twenty seven. So I think there's a lot of different
Speaker 6: possibilities here. You can't rule anything out. And I think
Speaker 6: that the fact is that the policymakers just aren't going
Speaker 6: to respond until their constituents are feeling pain. And right now,
Speaker 6: I mean, it's possible that this government shutdown. Everyone walks
Speaker 6: out of this and says boy that was more painful
Speaker 6: than we thought. And to your point, the data is
Speaker 6: that the economic pain is permanent. But I don't get
Speaker 6: the sense that's happening right now. But we'll see how
Speaker 6: people feel in a few weeks.
Speaker 2: John, things a change in dan in Washington, and can
Speaker 2: we just ramp things up by leaning on your experience?
Speaker 2: You know the Capital well, Nancy Pelosi is stepping a side,
Speaker 2: she's retiring, centered a sham er, is under immense pressure.
Speaker 2: You worked alongside. They form a leader Mitch McConnell longtime
Speaker 2: later of the Republican Party. What's left of Washington DC
Speaker 2: that you knew so well?
Speaker 1: Very little?
Speaker 6: I mean, I think you look at the committees on
Speaker 6: Capitol Hill. They don't do much anymore. They're not producing legislation.
Speaker 6: Lawmakers are no longer kind of growing. The senior lawmakers
Speaker 6: that are going to be running the show in the
Speaker 6: next five to ten years aren't ones that grew up
Speaker 6: in this era of bipartisan compromise where they came to
Speaker 6: Washington to do legislation and get bills done. There are
Speaker 6: people that came up in an age of Donald Trump
Speaker 6: and social media, and I think that creates a different
Speaker 6: set of incentives for lawmakers. It makes lawmaking harder. Congress
Speaker 6: has abdicated a lot of its responsibilities, and the public
Speaker 6: doesn't take it very seriously. So I think on Capitol
Speaker 6: Hill at least you're going to get a much weaker
Speaker 6: generation of leaders and no disrespect to the people who
Speaker 6: are there.
Speaker 7: Now.
Speaker 6: This is just a broader trend, and I think it
Speaker 6: means that Congress takes itself out of the governing game
Speaker 6: and puts itself into a full time campaign mode. That's
Speaker 6: going to define more and more of the noise and policymaking.
Speaker 6: Your hearing out of Washington.
Speaker 2: Stay with us. Multiple IMPERG surveillance coming up after this.
Speaker 2: Stok's rising invest as a way the end of the
Speaker 2: government's shutdown and the release of a lot I mean
Speaker 2: a lot of delayed data. Matt Meskin of John Hancock writing,
Speaker 2: bad news is bad news, especially when it comes to
Speaker 2: the jobs market and the FED being caukish. Regardless, markets
Speaker 2: have a trade. The headline's mentality that is far from fundamental.
Speaker 2: Matt joins us. Now for moret that last line, What
Speaker 2: did you mean by that?
Speaker 7: Well, I was just talking about you guys.
Speaker 8: Mentioning vibes here it's a vibe market, and it's all
Speaker 8: driven from settlement for the most part. And really what
Speaker 8: we're seeing is this jaws kind of presenting itself from
Speaker 8: the weaker economic data and the markets continuing to advance.
Speaker 7: You know, at the end of the day's sentiment.
Speaker 8: Is a very powerful short term market force, and we
Speaker 8: are seeing momentum investors.
Speaker 7: Around the world really allocy.
Speaker 8: Towards stocks because they're rallying even in these mornings. Now
Speaker 8: you're not even getting necessarily a narrative of why things
Speaker 8: are up other than it was up yesterday, and so
Speaker 8: we really see it even at the beginning of the week.
Speaker 8: On Sundays, it used to be Sunday Funday, and now
Speaker 8: it's Sundays are a time where markets open and there's
Speaker 8: usually some sort of headline that hits the markets first thing.
Speaker 8: So Monday morning we open stronger and that sets the
Speaker 8: vibe or the tone for the week. In our view,
Speaker 8: this is a time where you want to think about
Speaker 8: more defensive or conservative options to four portfolios and not
Speaker 8: to really overweight risk and over your skis in terms
Speaker 8: of risk at these kind of levels. But it's been
Speaker 8: a very strong year for markets, and we'll take it.
Speaker 2: So, Matt, let's unpack some of this and let's start
Speaker 2: with the data, the job's data. How relevant is the
Speaker 2: job's data to a market that's been driven by technology
Speaker 2: that is aren't could be holding back jobs data?
Speaker 8: Yeah, John, I mean this is the circular feedback loop
Speaker 8: that everyone's really highlighting is. You know, it doesn't matter
Speaker 8: about the jobs because these companies are running more efficient.
Speaker 7: The AI is helping them.
Speaker 8: Increase earnings, and as long as those earnings are going up,
Speaker 8: that helps the stock market. It makes sense, right, Well,
Speaker 8: the missing lynchpin of this argument is that you need
Speaker 8: the US consumer to spend. There is no more powerful
Speaker 8: economic for us globally than the US consumer. And if
Speaker 8: the US consumer doesn't have a job, they can't spend.
Speaker 8: And that's where we struggle to find this feedback loop
Speaker 8: and why we think that the weaker job's data really
Speaker 8: is going to present weaker consumer spending.
Speaker 7: You're already having weak consumer confidence.
Speaker 8: Now to us, this means the FED will end up
Speaker 8: cutting more than the market thinks. Right now, the FED
Speaker 8: is actually, in our view, over compensating a bit because
Speaker 8: they think they're going to be more hawk Excuse me,
Speaker 8: dubvish into twenty twenty six, so they're being a bit
Speaker 8: more hawkish now. It is really fascinating to see stocks
Speaker 8: really kind of just float through that with minimal impact.
Speaker 8: But in our view, the weaker jobs data is very
Speaker 8: material for this economy and markets in time.
Speaker 4: Matt, why do you reject the argument that in the
Speaker 4: beginning of next year we're going to get tax free
Speaker 4: and all sorts of other stimulative measures that really cause
Speaker 4: a boost to consumption.
Speaker 7: Yeah, at the end of the day, the jobs market,
Speaker 7: like I said, is so important.
Speaker 8: And when you look at these eight whether it's the
Speaker 8: Challenger layoff announcement, so the ADP data, and you look
Speaker 8: at prior periods when it rose or when it caused
Speaker 8: the initial jobs comes to arise, or the unemployment rates arise.
Speaker 8: It's usually about a month and a half lag time
Speaker 8: between the initial layoff announcements and when it hits the data.
Speaker 8: And really, if you kind of time that out here,
Speaker 8: it's the beginning of twenty twenty six, when initial jobs
Speaker 8: claimed starts to rise, the unemployment rate starts to rise.
Speaker 8: And you think about this, the unemployment rate, the last
Speaker 8: data point we had was four point three percent in
Speaker 8: August at five percent. Usually that's a recession, and we're
Speaker 8: already likely ticking up. I mean, yesterday Goldman Sachs said
Speaker 8: that more likely than not, we had a fifty thousand
Speaker 8: job decline here in October. If that was actually the
Speaker 8: release of that national non farm payroll, in our view,
Speaker 8: that would have been a shock to the system. And
Speaker 8: so that's what I struggle with, is if you're telling
Speaker 8: me that there's all these, you know, kind of good
Speaker 8: things coming in the pipeline, the other side of this
Speaker 8: is we're still going to be catching up on weaker
Speaker 8: data that really hasn't been released here in the last
Speaker 8: month or so.
Speaker 1: Matt that our.
Speaker 4: Word was kind of jarring for me because I haven't
Speaker 4: heard it in so long, and no one's talking about recession.
Speaker 4: I mean, that seems to be nowhere on any of
Speaker 4: the earnings calls from come corporate executives.
Speaker 2: Across the specter.
Speaker 4: We're not hearing mentions of an economic slowdown or anything
Speaker 4: like that. It really is coming at the slowest pace
Speaker 4: in terms of mentions of that. Going back to two
Speaker 4: thousand and seven, what does conservative mean in terms of investing?
Speaker 4: Does it mean just hide out in the tenure or
Speaker 4: does it mean actually high value companies that are also
Speaker 4: facing pretty elevated valuations in addition to yes, various steady
Speaker 4: cash streams.
Speaker 8: Yeah, so at the end of the day, there are
Speaker 8: companies that are growing earnings. We do like higher quality companies.
Speaker 8: Quality has not been in favor of this year. It's
Speaker 8: been more of a low quality rally, but in our
Speaker 8: view we would position higher quality. In the equity space,
Speaker 8: we are looking at infrastructure related equities across Europe right now.
Speaker 7: You're seeing Europe rally.
Speaker 8: Some of that is infrastructure related, utility type businesses that
Speaker 8: are throwing off dividends. They've got great earnings, so infrastructure
Speaker 8: related equities is one way to do it. We are
Speaker 8: looking at in the bond market, like you said, I mean,
Speaker 8: we're still getting nearly a five percent yield here, and
Speaker 8: yields have come down this year, but if the tenure
Speaker 8: did drop a low four percent, which is support, we
Speaker 8: think there's more return potential there. So there's still a
Speaker 8: lot of income and return potential out of the bond
Speaker 8: market in our view.
Speaker 7: Though on the.
Speaker 8: Equity side, we're more neutral on US large cap. We're
Speaker 8: overweight MidCap. To get more diversified exposure, better valuations, and
Speaker 8: we're underweight small cap because frankly, there's just so much
Speaker 8: nonprofitable businesses.
Speaker 7: There, so it's a lot of playle lowering data.
Speaker 2: Talk about vibes, the ultimate vibes. Try to the years
Speaker 2: Europe dressing up one percent GDP as if it's an
Speaker 2: next best big thing. Matt, you already want to stand
Speaker 2: Europe and equities into twenty six.
Speaker 8: So we would look to trimin's strength here and it's
Speaker 8: been this year is probably years worth of returns and
Speaker 8: you look back over time, I mean whether it's Italy.
Speaker 7: Or Spain, I mean Spanish stocks, who would have thought.
Speaker 8: I mean, the economy is doing great, so congratulations on
Speaker 8: that front. But really the stock market there is trading
Speaker 8: almost like it's another entity. And a lot of these
Speaker 8: markets are trading almost like they're just ticker symbols versus
Speaker 8: a company or a country, And we want to be
Speaker 8: notified if we want to be mindful of that that
Speaker 8: we're not really just day traders here. We're not just
Speaker 8: trading these for momentum, and we want to look at
Speaker 8: the underline fundamentals. But yeah, Europe is on fire this
Speaker 8: year European financials breaking out here and again. That is
Speaker 8: a sentiment and indicator. There's positive vibes globally right now.
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