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 am Marie Hordern. Join us each
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Mike, Good morning,
Speaker 2: see you, set, Good morning, how are you. I want
Speaker 2: to pick up on that quote and we're doing great.
Speaker 2: I want to pick up on a line that you're
Speaker 2: focused on the difference between FED funds and the front
Speaker 2: end of the York curve FED funds in a two
Speaker 2: year and that quote, how important is that?
Speaker 3: Well, that's a signal that we're getting from the Bomber.
Speaker 3: The by market has historically been a pretty good indicator
Speaker 3: where the FED is relative to kind of what they
Speaker 3: need to be doing. And we saw this, by the way,
Speaker 3: on the upside too. Right in the twenty twenty one
Speaker 3: time frame, the two year got a head on the
Speaker 3: f side. So it's the same picture just on the
Speaker 3: other side. And you know, people's complain, Oh the complain.
Speaker 3: They say, we're looking stock market is behaving fine, but
Speaker 3: that's not true internally.
Speaker 4: Once again, you know, defensive stocks are really doing extremely well.
Speaker 3: So I think I think the stock market is taking
Speaker 3: its cues from what the bomb market is saying. It's
Speaker 3: not saying hard landing yet. What it's saying is that
Speaker 3: growth has continued to disappoint it. So since April, and
Speaker 3: we've been on this program many times since then, I
Speaker 3: would say that the data has been und distinguishedly negative
Speaker 3: in terms of growth data. Also, the labor day has
Speaker 3: been much worse. So how is the equity market dealt
Speaker 3: with that? Well, it's pivoted from what I call quality
Speaker 3: growth to quality defensives and we made that pivot in
Speaker 3: May and that's classic late cycle behavior.
Speaker 4: So I think everything kind of sinks. It's just we're waiting.
Speaker 3: For the you know, like, can somebody give us the
Speaker 3: keys to the test, you know, the cliff notes whatever
Speaker 3: it is, and how's this going to end?
Speaker 2: And we don't know, but the market I'm going to
Speaker 2: losk you face. You've said one of two things. Either
Speaker 2: the FED cuts aggressively or the labor market starts to
Speaker 2: improve and improve quickly. That's right, Equity markets to perform well.
Speaker 2: So if you've got a base cases that one of
Speaker 2: the others, we get one or the other.
Speaker 3: Well, what I would say is that the FED could
Speaker 3: get ahead of the curves they decide. But the problem
Speaker 3: they're constrained. Okay, they're constrained by two things. Not inflation,
Speaker 3: by the way, inflation's over, as far as I'm concerned.
Speaker 4: Inflation.
Speaker 3: They beat that. They're What the issue is now is
Speaker 3: the currency market. If they come in and start cutting aggressively,
Speaker 3: the end dollar relationship is going to create some stress,
Speaker 3: so they gotta be careful with that. The other thing
Speaker 3: I went through out there is we've looked at this.
Speaker 3: When the FED starts a cutting cycle with fifty basis
Speaker 3: points as opposed to twenty five, the chance of soft
Speaker 3: landing goes down materially. And they noticed, they know this data,
Speaker 3: they don't want to signal that.
Speaker 4: So they're in a tough spot. The Fed's in a
Speaker 4: difficult spot. They've They've done you a good job.
Speaker 3: Of trying to navigate this challenging different environment that we've
Speaker 3: been in for the last several years. But now the
Speaker 3: markets are pressing them, and so next week, I don't
Speaker 3: really care what they do next week. What I care
Speaker 3: about is how the markets react, how do the markets
Speaker 3: behave after they don't They're going to do twenty five probably,
Speaker 3: and then where do they stay in the press.
Speaker 5: Conference the vibes, whether they actually work for the market
Speaker 5: or not. I'm curious though, before we go into quality
Speaker 5: growth and quality defensive and what that actually means. You
Speaker 5: say something about the currency differential. Are there certain target
Speaker 5: levels that you see sort of unwinding some of the
Speaker 5: longs that still remain out there. Do you have a
Speaker 5: sense of just how disruptive the ongoing long trade for
Speaker 5: the dollar really will be potentially eight down the road.
Speaker 3: Yeah, I mean I don't have a specific level, but
Speaker 3: I do feel like they're trying to defend this low
Speaker 3: one forties level between yen dollars, so call it one
Speaker 3: forty two. If we start to you know, one thirty ish,
Speaker 3: you know, one thirty eight, one thirty nine, I think
Speaker 3: that could cause some stress in other markets.
Speaker 5: Meanwhile, you talk about shifting from quality growth to quality defensive.
Speaker 5: I've struggled with these monikers quite a bit simply because
Speaker 5: what does defensive? What does growth mean? Where does Nvidia
Speaker 5: fit into this, or does a tech trade go Given
Speaker 5: the fact that people have gotten an AI trade that
Speaker 5: is so inflated in terms of expectations and timing, what
Speaker 5: does that mean to you? Quality defensive?
Speaker 3: You know, defensives are your classic defensive sectors, whether it's utilities, staples, healthcare,
Speaker 3: things that are positively correlated to bonds. Okay, they and
Speaker 3: they did not trade well by the way up until
Speaker 3: sort of April.
Speaker 4: It was really the quality gross stacks.
Speaker 3: Now the other thing that's happened is the AI dream
Speaker 3: has taken you know, a little bit of that luster
Speaker 3: has come off, and I really gazed up by what
Speaker 3: semi conductors are doing.
Speaker 4: It's not just videots, it's semi.
Speaker 3: Connectors writ large, and a lot of those stocks have
Speaker 3: really come off, and that makes sense to me.
Speaker 4: We just we just got overcooked on the whole AI theme.
Speaker 4: Doesn't mean it's over.
Speaker 3: We've written about this extensively, like we're not believers that
Speaker 3: this is going to change productivity materially in the short term.
Speaker 3: That's a long term story, and everything kind of got
Speaker 3: bit up on that. So with that theme now gone,
Speaker 3: the market is looking for a new theme.
Speaker 4: On a gross side, there.
Speaker 3: Isn't one, So it does it hunkers down into defensive,
Speaker 3: high quality assets until we get the next thing, whether
Speaker 3: that's a bad outcome or a positive out come.
Speaker 4: They're going to hide out in these areas.
Speaker 1: Mike, you say inflation's over. We do have CPI data
Speaker 1: though today, So I'm curious to know, how do you
Speaker 1: think the market would trade if we get say a
Speaker 1: hotter print says is it too volatile or softer print?
Speaker 1: Would the markets start pricing in fifty or look at
Speaker 1: a softer print and say, wow, we are cooling down
Speaker 1: faster than even the FED was expecting. And bad news
Speaker 1: really is bad news.
Speaker 4: Yeah.
Speaker 3: Well, when I send inflation's over, I mean the ry
Speaker 3: to change on inflation is over, and it's kind of
Speaker 3: over for equity markets, and quite frankly it's over for
Speaker 3: the FED. Where inflation is not over is the price level, right,
Speaker 3: The price level is absolutely squeezing the heck out of
Speaker 3: businesses and consumers, and so it's like a vice.
Speaker 4: And so I don't think inflation's over. An ergar.
Speaker 3: But what I would say is that, you know, hot
Speaker 3: number I think is probably pretty bad for the stock
Speaker 3: market today.
Speaker 4: I'm not expecting that.
Speaker 3: But if we've got hot number today, then all of
Speaker 3: a sudden, the FED is going to stay behind the curve.
Speaker 4: They're kind of stuck.
Speaker 3: If we get a really soft number, then we go
Speaker 3: back to our old thesis, which is pricing power is gone. Okay,
Speaker 3: so we kind of need to thread the needle here
Speaker 3: a little bit too. I mean, break evens are at
Speaker 3: two percent now breaking away, So what are we talking about.
Speaker 3: We're already at two percent and it's not like these
Speaker 3: things stop on a dime. You know, there's a risk
Speaker 3: that we undershoot on the downside. That's good for bonds
Speaker 3: and it's bad for stocks typically, And by the way,
Speaker 3: that's how the stock market, that's how the markets are trading.
Speaker 4: So I think I think the market's already understand all
Speaker 4: of this. Once again.
Speaker 3: They're going to do something next week to try and
Speaker 3: manage the situation. Twenty five is what we think, and
Speaker 3: they'll signal for more twenty fives, not fifties, and then
Speaker 3: what do they do at the balance?
Speaker 4: I think that's probably the bigger wildcard.
Speaker 3: Do they talk more aggressively about ending Q team more quickly,
Speaker 3: do they find other other provisions to provide liquidity. That's
Speaker 3: the bold case in my view. That's where we could
Speaker 3: be surprised on the f side. Is there more liquidity
Speaker 3: coming into the system from other sources?
Speaker 1: And after next week, then everyone's going to really be
Speaker 1: focused on the US election. Goldman Sachs RBC. They talk
Speaker 1: about how earnings will be much higher potentially under Trump
Speaker 1: administration if he gets his tax cut plan rather than
Speaker 1: Harris who's calling for twenty eight percent. How do you
Speaker 1: view next year earnings growth based on these two proposals.
Speaker 3: Assuming that the economy is in a soft landing, okay,
Speaker 3: if it hasn't overstated, it's welcome. And by the way,
Speaker 3: I think that risk is still on the table. We're
Speaker 3: in the soft landing camp, but it's that to me
Speaker 3: is way more important than the outcomist election in the
Speaker 3: next six to twelve months. So let's assume we're in
Speaker 3: a soft landing.
Speaker 4: Our views the same.
Speaker 3: We think that basically Trump is kind of pro growth,
Speaker 3: kind of bad for bonds, good for stocks, okay, And
Speaker 3: that's how we would look at it. And by the way,
Speaker 3: last night, when the debate was going on, the betting
Speaker 3: markets kind of went in favor of Harris, and the
Speaker 3: stock market futures kind of trade a little bit okay,
Speaker 3: But I do think the stock market is pro Trump.
Speaker 3: I mean, the stock market has traded better when his
Speaker 3: odds go up and vice versa.
Speaker 2: So Bonsaw good unto Harris and stock's a bad unto.
Speaker 3: Harris in theory, I mean, at the margin, I would
Speaker 3: say that's the setup, and.
Speaker 4: The reason being is really taxes.
Speaker 3: Taxes is the one thing that requires some congressional support too.
Speaker 3: But to me, that's the big issue, not tear so much,
Speaker 3: both administrations of tariffed and then immigration. I think both
Speaker 3: parties are going to deal with that in some way.
Speaker 3: So taxes is the issue. Obviously Trump is talking about
Speaker 3: cutting parents, is talking about raising them.
Speaker 4: That's bad for stocks, good for bonds.
Speaker 2: I wanted to ask you this question. I want to
Speaker 2: squeeze it into the very end. Least was knocking on
Speaker 2: the door. Utility is actually defensive. They're up like twenty
Speaker 2: percent this year, and it feels like everyone's getting whatever
Speaker 2: they want from utilities. It's defensive. It's at touched to
Speaker 2: AI what are utilities?
Speaker 4: So this is a very interesting question. So you know,
Speaker 4: we agree. I mean, we don't think we were one
Speaker 4: of the first ones to talk.
Speaker 3: About utilities as an AI beneficiary back in February March.
Speaker 4: I think that's probably gotten.
Speaker 3: A little overdone, to be honest. But now utilities are
Speaker 3: definitely trading with the bomb market, so they are the
Speaker 3: defensive properties of utilities are I think, dominating their performance
Speaker 3: in the near term. Here's the interesting about utilities. Their
Speaker 3: balancees are typically are not great. Okay, so you gotta
Speaker 3: be really careful with utilities. If it's going to be
Speaker 3: hard landing, these things are going to start trading really poorly.
Speaker 3: Caution listeners. If you totally start treating really poorly and
Speaker 3: the stock market's not ripping, that's a bad sign. That
Speaker 3: would be a sign that, oh, we are actually getting
Speaker 3: closer to potentially hard landing risks.
Speaker 4: That hasn't happened yet.
Speaker 3: But if you look at things like low volatility parts
Speaker 3: of the of the stock market or defensive, they've gone
Speaker 3: almost parabolic, and if they start to sell off hard
Speaker 3: without a stock market rally, then I get concerned about
Speaker 3: hard landing risk.
Speaker 4: That's not the case today.
Speaker 2: Interest in This was great clinic, hanzill West, Thank you, sir,
Speaker 2: Mike Wilson that it's the late says coming on. How
Speaker 2: is challenging Donald Trump to a second debate? With the
Speaker 2: eight weeks remaining until election day, Trump sang on Fox
Speaker 2: News earlier he is less inclined to debate Harris once again.
Speaker 2: Rob Casey of Signum Global writing this, Harris had a
Speaker 2: very good night. She did not land any knockout punches.
Speaker 2: This is going to be a close race tomorrow as
Speaker 2: it is today. But Harris carried us off with great
Speaker 2: composure and successfully defined a stark comparison between her policies
Speaker 2: and those of Trump. Rops with us around the table, Rob,
Speaker 2: good morning to you, sir.
Speaker 4: Morning.
Speaker 2: You said she had the edge going into this. She
Speaker 2: base cases that Harris wins this election. Did anything change overnight?
Speaker 6: You know, I don't think a lot changed. I think
Speaker 6: Harris had a good night. But how voters feel about
Speaker 6: Kamala Harris and how voters feel about Donald Trump. I
Speaker 6: think yesterday into today not a whole lot different. You know,
Speaker 6: Harris did introduce herself to more voters, voters who maybe
Speaker 6: didn't know much about her as she was a senator
Speaker 6: and VP maybe didn't turn into the Democratic National Convention.
Speaker 4: So I think in that sense, you know.
Speaker 6: Harris proved that what proved once again she can be
Speaker 6: on that stage. She deserves to be on that stage,
Speaker 6: even though she didn't win any primary votes. But that
Speaker 6: being said, this was not a debate to change people's minds.
Speaker 2: There's a phrase that you've used you and the team
Speaker 2: in your research, asymmetric incumbency. You get to fly on
Speaker 2: Air Force two, but without the baggage. Now, the former
Speaker 2: president seems to be doing a pretty poor job of
Speaker 2: prosecuting the case and getting people to realize that there
Speaker 2: is some bankat chair. Where is he folding shill? On
Speaker 2: that front, I.
Speaker 6: Think it's a much easier argument to make against Joe
Speaker 6: Biden than it is against Kamala Harris. You know, I
Speaker 6: think most of us in the country understand that the
Speaker 6: vice president doesn't have a whole.
Speaker 7: Lot of power.
Speaker 6: Was she tasked with the border to a certain extent? Yes,
Speaker 6: Do I think that that's a very successful attack line
Speaker 6: against Kamala Harris. Yes, and it's one that Trump made
Speaker 6: last night. But that being said, you know, she's essentially
Speaker 6: an undefined quantity. She's done a better job of defining
Speaker 6: herself than Trump has it defining her.
Speaker 1: Some individuals are going to start voting next week, especially
Speaker 1: in a swing state like Pennsylvania. Trump saying he's less
Speaker 1: inclined to debate Harris again. This morning on Fox Kamala,
Speaker 1: Harris's team came out right away and said, we want
Speaker 1: a second debate. What benefits her of having a second
Speaker 1: debate if you and many others would say, And the
Speaker 1: predict market has her up now saying she won this one.
Speaker 6: You know, I think that was a stellar decision by
Speaker 6: the Harris campaign to come out and say immediately after
Speaker 6: that she's ready to go again. Right, she won, she
Speaker 6: wants to do it again. She doesn't think it was
Speaker 6: a fluke. She's happy to step on any state anytime.
Speaker 6: That being said, you know, I don't think Trump is
Speaker 6: eager to get back on a stage. And there's a
Speaker 6: lot of back and forth about the rules and anchors
Speaker 6: and moderators, and last night maybe fairly so, so I
Speaker 6: think it'll be it'll be hard for the two campaigns
Speaker 6: to come to an agreement about a second a second debate.
Speaker 6: That being said, I think brilliant move by the Harris
Speaker 6: campaign to say that she's ready to go again.
Speaker 1: I know this wasn't actually in the debate, but Taylor
Speaker 1: Swift did come out after and endorse Kamala Harrison. The
Speaker 1: reason why I'm interested about this is because Evan wroth
Speaker 1: Smith yesterday said they're going after last night five hundred
Speaker 1: thousand people. Does Taylor Swift actually move the margins into
Speaker 1: Harris camp?
Speaker 6: You know, I think she moves the margins marginally. I mean,
Speaker 6: I don't think it's a huge change to the race.
Speaker 6: I think it's the single most important celebrity endorsement in
Speaker 6: this campaign, certainly maybe in US presidential history. And that's
Speaker 6: because you know, the Taylor Swift base, if you want
Speaker 6: to call it, is largely white, suburban women, often young women.
Speaker 6: These are the voters who could decide the election. They're
Speaker 6: certainly voters motivated by abortion of other issues. And so
Speaker 6: for Taylor Swift to come out very explicitly last night
Speaker 6: following the debate in support of Vice President Harris, I
Speaker 6: think it can only help her, although maybe not that much.
Speaker 5: Just to build on something both Emory and John we're
Speaker 5: talking about, how much at this point you can the
Speaker 5: only thing that really changes the tune of this election
Speaker 5: come to turnout. Essentially, this is just a turnout game
Speaker 5: more than anything else.
Speaker 6: Yeah, it really is. And between now November, and we
Speaker 6: talked about this last week. You know, there aren't a
Speaker 6: whole lot of things that are likely to change the
Speaker 6: election a whole lot, right, We talked about October surprises
Speaker 6: all the time. The data doesn't really show that October
Speaker 6: surprises change voter's minds a whole lot. So between now
Speaker 6: and November, I think the question is can Kamala Harris
Speaker 6: sustain her momentum out of the convention. She didn't get
Speaker 6: the bump that I think she and Democrats would have
Speaker 6: liked in the past week. She's seen some polls that
Speaker 6: are not quite as positive as in the past month.
Speaker 6: But coming out of the debate and sort of this
Speaker 6: is really the sprint of the finish. The question is
Speaker 6: can't she sustain the momentum necessary to turn out Democrats
Speaker 6: across the country. Of course, she's helped by issues like
Speaker 6: abortion among others that are explicitly on the ballot. As
Speaker 6: long as she doesn't you know, stub her toe, I
Speaker 6: think the momentum is such that turnout will benefit Harris
Speaker 6: in November.
Speaker 5: From Marcus perspective, it seems like a lot of people
Speaker 5: are discounting the election to a large degree, partly because
Speaker 5: there's no visibility, but also partly because there is an
Speaker 5: assumption that there will be divided government and that nobody
Speaker 5: will actually get their agenda fully through. What gives you
Speaker 5: confidence that that's going to be the case at a
Speaker 5: time where potentially, if it comes down to turnout, then
Speaker 5: more turnout for one candidate could mean more downpellate races
Speaker 5: that people win as well.
Speaker 6: Yeah, absolutely, And I think that you know, a blue
Speaker 6: wave under a Harris campaign is more likely than it
Speaker 6: was under a Biden campaign because Biden proved to be
Speaker 6: such a drag on Senate and House races for Democrats.
Speaker 6: That being said, the Senate map essentially comes down to
Speaker 6: a few particular states that Trump is going to win
Speaker 6: by thirty thirty five points. I mean, I'm talking about
Speaker 6: Montana in particular, if John Tester can't win that seat.
Speaker 6: Of course, assuming that Republicans take Wey Virginia following Joe
Speaker 6: Mansion's departure, that leads us to a fifty to fifty
Speaker 6: or a fifty one forty nine Senate in favor of Republicans.
Speaker 6: Of course, that's a divided government necessarily, So I think
Speaker 6: it's really the Senate math. As good as Democrats feel
Speaker 6: about the presidency, as good as they feel about the House,
Speaker 6: and they feel very very good about the House, it's
Speaker 6: the Senate math that is not in Democrats' favor. And
Speaker 6: I think Republicans are probably able to flip Montana, if
Speaker 6: not one or two other states.
Speaker 2: I know this is scenario analysis with various probabilities attached
Speaker 2: to it, and we can sit here and say it's
Speaker 2: a low probability outcome. But if we got a blue sweet,
Speaker 2: wouldn't that be absolutely terrible for equities in America?
Speaker 6: Yeah, I mean, point plank, Yes, I do think it
Speaker 6: would be a problem. There are not the moderating forces
Speaker 6: in Congress that there were under the first two years
Speaker 6: of the Biden presidency, which was, as we all remember,
Speaker 6: a blue wave, but a blue wave tempered by Joe
Speaker 6: Mansion and Kirsten Cinema. And there would not be those
Speaker 6: voices in a new Congress under Harris. I mean, you know,
Speaker 6: as we've all seen, the Wharton budget model suggests that
Speaker 6: Harris is writ large where they all to pass what
Speaker 6: would not be quite as deficit negative as trumps across
Speaker 6: the board. But that being said, you know, a blue
Speaker 6: wave without kind of the blue dog, very very moderate
Speaker 6: senators who are willing to stand up against the Party.
Speaker 6: I do think that that would be negative for equities overall.
Speaker 2: Interesting, Rob, Thank you, sir, web case of signal David Kelly,
Speaker 2: jpm molk and I said management to stay for shoots
Speaker 2: of miss wall join us now for a little bit more, David,
Speaker 2: let's get into the data first, and your reaction to it.
Speaker 2: Is this noise or news for the Federal Reserve.
Speaker 8: I think it's it's more noise than news in the
Speaker 8: fact that the core number was slightly higher than expected
Speaker 8: for the month. If you look at it, we've got
Speaker 8: a three point nine percent jump in airline pairs of
Speaker 8: very balls, so they were down last month.
Speaker 7: They're not you know, given the number of people traveling.
Speaker 8: Frankly, it's amazing that we don't have more airline inflation.
Speaker 7: We've also got to bump in tobacco prices, which are
Speaker 7: pre vols a month to month.
Speaker 8: But outside of that, it's it's very much on track,
Speaker 8: you know. And I've been talking for a long time
Speaker 8: about you know how the economy is or how inflation
Speaker 8: is cooling, it's just cooling too slowly. Well, I can
Speaker 8: say that it is now cool to room temperature. I mean,
Speaker 8: at two point five percent a year over year, there
Speaker 8: really is not a significant inflation problem. I realize that,
Speaker 8: you know, shelter is going to take a little while
Speaker 8: to come down from here, But even on things like
Speaker 8: auto insurance six tensor percent, it's this is coming away
Speaker 8: from a twenty percent year over year gain, So overall
Speaker 8: it looks very well controlled. To me, it looks like
Speaker 8: we're not seeing deflation. We're just seeing a gradual disinflation
Speaker 8: of the inflation is gradually coming out of the system.
Speaker 7: And frankly, you know unemployment.
Speaker 8: Four two, CPI inflation two five, add those together six seven.
Speaker 8: That's better than it's been eighty five percent at the
Speaker 8: time over the last fifty years.
Speaker 7: So it's really not a bad economy. It's a good economy, and.
Speaker 8: I don't think I don't think it calls for any
Speaker 8: drastic FED action.
Speaker 7: I'd be very happy to see twenty five basis points
Speaker 7: next week.
Speaker 2: The we're in the quiet period. We've got all the
Speaker 2: datesa Now, given what you just said David, does this
Speaker 2: reinforce the case that we get twenty five? I know
Speaker 2: you'd be happy to say it, but do you expect it?
Speaker 7: Yes?
Speaker 8: I do, because I think the Fed must be aware
Speaker 8: that if they go aggressive here, they're in danger of
Speaker 8: undermining consumer confidence. And honestly, the economy is doing exactly
Speaker 8: what they wanted to do. It is settling into a
Speaker 8: softer expansion of sower expansion. That's what they want, so
Speaker 8: they only have to gradually return to normal and interest rates.
Speaker 5: This to me is a really interesting moment. David Kelly
Speaker 5: and Stever Shudo, I think are going to agree. Stever
Speaker 5: Shudo is here and is this something that you kind
Speaker 5: of agree on that twenty five basis points is the
Speaker 5: appropriate and logical.
Speaker 4: Conclusion from this data we just got.
Speaker 9: Yeah, twenty five has been our call for quite some time.
Speaker 7: We haven't changed.
Speaker 9: We didn't fall into the overall concept of seventy five
Speaker 9: basis points and fifty basis points. This rate cut arms
Speaker 9: race that my colleagues on the street have been engaging in,
Speaker 9: I think has been counterproductive. I do think the reality
Speaker 9: of the situation is one where yeah, it is a
Speaker 9: healthy economy, and that really goes against the point of well,
Speaker 9: then I really can't get into the inflation numbers and
Speaker 9: throw this in that out and say it's really going
Speaker 9: nowhere or it's room temperature, and taking out the household
Speaker 9: component of this, the rental component of this, I also
Speaker 9: think is wrong because when you look at the dynamics
Speaker 9: of the rental market, you know, we were all worried
Speaker 9: about the excess build of residential real estate, and guess what,
Speaker 9: it's all being used up. So I don't think rents
Speaker 9: are going to be something that comes down. And I
Speaker 9: think it's indicative of the fact that the economy is
Speaker 9: fundamentally healthy and a four point two percent unemployment rate
Speaker 9: is low, and therefore it is low. It is a
Speaker 9: healthy economy. So the Fed should be moving people's expectations
Speaker 9: back from these large rate cut discussions into a much
Speaker 9: more gradual, steady approach at getting back to neutral and
Speaker 9: really begin the debate over what is neutral, because their
Speaker 9: number of two and three quarters is much too low.
Speaker 5: Yeah, and no one really wanted to engage with that
Speaker 5: in any kind of verbal right in a Jackson hole.
Speaker 5: I am curious of your surprise the market's reaction right
Speaker 5: now that equities are lower, at least initially understanding it's
Speaker 5: not always the correct move or the one that's going
Speaker 5: to stick. But does it make sense to you that
Speaker 5: it would be lower by taking thirty basis points maybe
Speaker 5: a little off the table.
Speaker 9: Yeah, because if I have a possibility of the FED
Speaker 9: over stimulating, I'm going to have a bit more inflation.
Speaker 9: And if I have a bit more inflation, guess what,
Speaker 9: I'm going to have better earnings. I'm going to have
Speaker 9: a stronger economy and better earnings. So I think, you know,
Speaker 9: as Jonathan was talking earlier, I think what the market
Speaker 9: is really doing is saying, Okay, we have a really
Speaker 9: good economy. We know we can get this level of earnings.
Speaker 9: If they're going to really push this thing with three
Speaker 9: fifty basis point cuts, is a lot of people want
Speaker 9: to anticipate we're going to have an economy that is
Speaker 9: going to be potentially accelerating twenty twenty five, and I
Speaker 9: could potentially think about raising my twenty twenty five earnings numbers,
Speaker 9: not cutting them.
Speaker 4: Steve Free fifteen percent.
Speaker 1: When you talk, you sound that rosy. The economy is
Speaker 1: doing very well. Do you think there even should be
Speaker 1: a recut?
Speaker 9: Look you've reached excuse me, you've reached a point in
Speaker 9: the cycle where inflation has come down to a level
Speaker 9: that you could begin the process of normalizing rates. The
Speaker 9: real question is where is that level of neutral rates?
Speaker 9: And this is the debate to me that really matters,
Speaker 9: because I think the neutral rate is four percent a
Speaker 9: two percent real return, a two percent inflation target. Assuming
Speaker 9: they can get there four percent FED funds rate. The
Speaker 9: FED is thinking two and three quarters. The market is
Speaker 9: thinking two and a half to three, so they're basically
Speaker 9: in the two and three quarters per category. That's much
Speaker 9: too low. And if we get to that subsidy level
Speaker 9: of interest rates, then you wind up pushing the economy.
Speaker 9: And I think this is where the FED is not
Speaker 9: doing its job. The FED really blunts to believe that
Speaker 9: we're going back to that post financial crisis, pre COVID
Speaker 9: period of exceptionally low levels of interest rates, and I
Speaker 9: just don't see us getting there because that was a
Speaker 9: unique period in time where we had what we had
Speaker 9: a dead overhang, we had a bank restructuring, and we
Speaker 9: had a massive tax increase state.
Speaker 2: That's reckon on something that we had from Tilston's slow
Speaker 2: he was basically in the same thing who was asking
Speaker 2: the question to whether we are actually sufficiently restrictive. David Kelly,
Speaker 2: I know you've got thoughts on this matter, so let's
Speaker 2: discuss it with you as well. Where's neutral? How are
Speaker 2: you thinking about neutral?
Speaker 7: Yeah?
Speaker 8: I know Steve and I are supposed to disagree, but
Speaker 8: I think we're quite closely gone.
Speaker 7: I would say three and a half to four percent.
Speaker 8: I mean, if you look at the fifty years before
Speaker 8: the Great Financial Crisis, the federal funds rate to average
Speaker 8: two percentage points above core CPI inflation. If we end
Speaker 8: up at two percent on inflation, I have no problem with.
Speaker 7: The federal funds rate about four percent.
Speaker 8: But I do think that and I think the Fed's
Speaker 8: long term target will probably gradually go up.
Speaker 7: It certainly should, but I also think they.
Speaker 8: Should gradually move rates back down to that level because
Speaker 8: I think we are.
Speaker 7: Suffering today from the aftermath.
Speaker 8: Of infrast rates which are way too low between the
Speaker 8: Great Financial Crisis and the pandemic, and that caused an
Speaker 8: enormous inflation in home prices and other asset prices.
Speaker 7: You know, the carrying cost.
Speaker 8: Are crazy was zero, and so we've got a lot
Speaker 8: of crazy bets out there now. I think a lot
Speaker 8: of Americas are locked out of the housing market right
Speaker 8: now because home prices are too high given a normal
Speaker 8: level of more.
Speaker 7: So I want them to, you know, if there's.
Speaker 8: Nothing wrong with the economy fundamentally, if it's basically on
Speaker 8: the right track, you shouldn't have an active policy either way.
Speaker 8: You shouldn't be restrictive, you shouldn't be a stimmlative.
Speaker 7: You should get back to neutral. And neutral is less
Speaker 7: than you.
Speaker 8: Know, five and quarter five and a half percent of
Speaker 8: the federal fundraate, so that they should get going, but
Speaker 8: they should go slowly because there's no need to upset
Speaker 8: anybody here.
Speaker 7: Just gradually get back to neutral.
Speaker 2: One market is still falling, yields up now by almost
Speaker 2: ten basis points at the front end of the curve
Speaker 2: on a ten year by four basis points, and that
Speaker 2: two year ten year just turn a negative just briefly.
Speaker 2: We'll see if that sticks. For the fifth time on
Speaker 2: this program, stave a Shut, I want to come back
Speaker 2: to you. You touched on the differences between now and
Speaker 2: twenty nineteen. The difference between where you think neutral is
Speaker 2: and where the FED is anywhere between one hundred and
Speaker 2: one hundred and fifty basis points. Why are they still
Speaker 2: there in the twos? Is it because they don't want
Speaker 2: to have the conversation yet, they don't want to signal
Speaker 2: where things are. They haven't thought about it, or do
Speaker 2: they truly believe this is where neutral is no?
Speaker 9: Again, I think the policy make is you're looking at
Speaker 9: are political economists, and getting back to that low level
Speaker 9: of interest rates allows them to do things that they
Speaker 9: would like to do. It allows them to try to
Speaker 9: create an environment where they're going to try to rebalance
Speaker 9: income distribution, and they're going to try to grow the
Speaker 9: employment rate and grow wage and salary and come to
Speaker 9: make up for the shortfall that was created by the
Speaker 9: COVID inflation. And I think this is their underlying motivation.
Speaker 9: I can't argue with the motivation. I can argue with.
Speaker 7: The tactic to get there.
Speaker 9: I don't think the aggressive adjustments or the fact that
Speaker 9: we have to get to lower levels of rates are
Speaker 9: going to do it for them. I think they're better
Speaker 9: off doing again. David and I agree doing a very
Speaker 9: gradual approach to allow the economy to adjust to this,
Speaker 9: allow the economy to move on its own basis, not
Speaker 9: based on policy stimulus. This is a fat that I
Speaker 9: think wants to add policy stimulus in twenty twenty five
Speaker 9: when there's going to be less fiscal policy stimulus. And
Speaker 9: then when we get a new president, we get a
Speaker 9: new budget, we're going to have fiscal stimulus in twenty
Speaker 9: twenty six. So they're going to try to juice the
Speaker 9: economy as long as they can because they believe global
Speaker 9: deflation bails them out.
Speaker 2: I'm not sure if I should be happy or nervous
Speaker 2: that you both finally agree, but this is what we've got.
Speaker 2: Scared David, Kenny, Steven Shashudo to the both of you.
Speaker 2: Thank you, guys, appreciate it. This is the Bloomberg Surveillance Podcast,
Speaker 2: bringing you the best in markets, economics, an gie politics.
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