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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: for a long discussion. Jim's out to the president of
Speaker 2: Apollo Global Management. Jim, good morning, Good morning driving, and
Speaker 2: happy birthday. Sarah's good time very much.
Speaker 3: I appreciate it.
Speaker 2: We spend too much time on the Federal Reserve. But
Speaker 2: I do want your reaction to this journal piece overnight.
Speaker 3: Well, I think I think that the President's already won.
Speaker 3: It's a great distraction of headlines. I personally don't think
Speaker 3: he's going to name anybody too early because right now
Speaker 3: he's in the catbird seat of blaming without accountability, which
Speaker 3: is classic Trump playbook. So I think the fact that
Speaker 3: we're talking about. It is interesting. It's a great diversion
Speaker 3: from the reality I think he does. There's no doubt
Speaker 3: he wants rates lower. That's what's part of his plan
Speaker 3: for many, many years, and that's how he doesn't like
Speaker 3: to pay debt and he likes to pay low coupons
Speaker 3: on it. But the fact that you know, I just
Speaker 3: don't think that if you're Trump right now and you
Speaker 3: take his playbook, he'll make this a conversation. But I
Speaker 3: don't suspect he's going to do anything premature because he's
Speaker 3: able to put blame on the current resident of the Fed,
Speaker 3: and he likes to be in that position.
Speaker 2: Your word's blaming with accountability without accountability. Is this something
Speaker 2: you think he should be accountable for.
Speaker 3: Well, certainly, I think if you think about what's going
Speaker 3: on in the last three or four months, the issues
Speaker 3: of tariffs, it feels like that's a little bit on
Speaker 3: the sidelines right now. I know we haven't resolved, but
Speaker 3: the marketplace has absorbed the idea of a ten percent
Speaker 3: plus or minus tariff, maybe a little bit higher, but
Speaker 3: to Trump's benefit, in the administration's benefit, the market has
Speaker 3: absorbed that, moved on the issues about the Middle East
Speaker 3: and all the challenges of foreign policy. There was a
Speaker 3: lot of action last ten days ago and a week
Speaker 3: and a half ago, and now that has been sort
Speaker 3: of absorbed in the marketplace. The big elephant in the
Speaker 3: room is still our deficit issue. You guys have talked
Speaker 3: about it quite a bit. It's obviously the topic of
Speaker 3: appropriate conversation, and so I think that is an important
Speaker 3: topic that still remains. But we talked earlier in this
Speaker 3: year about the decline of US exceptionalism. I think Mark
Speaker 3: Twain was right that the PREMI that my death is
Speaker 3: a bit premature, and certainly the market has moved on.
Speaker 3: So I think the tariffs are a little bit off
Speaker 3: on the side, the foreign policy issues are a little
Speaker 3: bit off the side. Right now. The deficit issue is
Speaker 3: a real issue. We can talk a little bit about
Speaker 3: what's going on with the dollar. I personally think what's
Speaker 3: going on with the dollar. I think there was a
Speaker 3: lot of investors around the globe that invested in US
Speaker 3: assets and they made money both ways on the currency
Speaker 3: and on the underlying assets for almost ten years. And
Speaker 3: they turned around and they found themselves really unhedged. And
Speaker 3: I think you're going to see some pretty good numbers
Speaker 3: out of the big banks this quarter because investors around
Speaker 3: the globe have been rushing to hedge their dollar exposure.
Speaker 3: But I think it's a ten year catchup that people
Speaker 3: just didn't hedge their portfolios in massive scale. So I
Speaker 3: don't look at this dollar decline is I look at
Speaker 3: it as more of a technical factor than a long
Speaker 3: long run impact on the health of the US economy.
Speaker 1: There's a lot to impact there, including the breakout of
Speaker 1: the hedging profits at some of the big banks, which
Speaker 1: we'll all be now looking for. To build on what
Speaker 1: John is asking about is the FED on the brink.
Speaker 1: I don't want to say I have a policy error,
Speaker 1: but it being too late kind of to build on
Speaker 1: what President Trump is accusing him, because you are seeing
Speaker 1: the weakening and the dollar accompanied by the biggest negativity,
Speaker 1: the biggest in in downside economic surprises that we've seen
Speaker 1: in a year.
Speaker 3: If you look at the Bloomberg page on rates of
Speaker 3: the G seven economies other than the UK, where the
Speaker 3: outlier in terms of where our ten year yields are
Speaker 3: and our yield curve is. You know, I sit in
Speaker 3: my seat and I see a variety of inputs that.
Speaker 3: Some tell me the economy is slowing down a little
Speaker 3: bit with consumers. Some tell me inflation is still a
Speaker 3: little bit more represented in the economy. I see, we
Speaker 3: see inflation around three percent, three three and a half percent.
Speaker 3: And I don't think it's obvious that the FED should
Speaker 3: be cutting right now. I think it is a very
Speaker 3: legitimate question to be asking what's the trajectory of the
Speaker 3: FED activity? And so I don't think it's a slam
Speaker 3: dunk decision. I know the market that the futures would
Speaker 3: tell you three cuts in the next the rest of
Speaker 3: the year, three three and f cuts, you know, Tors
Speaker 3: and I are a bit skeptical on that. We see
Speaker 3: what's going on, and I think there's maybe one cut.
Speaker 3: Your basic question, is the FED conversation a really important
Speaker 3: one right now? It is. I have a view that
Speaker 3: rates are going to be a little bit stickier and
Speaker 3: higher in the US than people think. We've had that
Speaker 3: view for quite some time. But so it is a
Speaker 3: good question for the administration to have right now. But
Speaker 3: I'm not sure that's the primary question for the market.
Speaker 1: One of the reasons why people keep asking this question
Speaker 1: is would the FED be considering cutting for.
Speaker 4: The right reasons for the wrong reasons.
Speaker 1: The right reasons being disinflation, which you reject, but the
Speaker 1: wrong reasons being because we are seeing a weakening in
Speaker 1: the labor market as we see as an increase in
Speaker 1: jobless claims. What's your sense of that based on what
Speaker 1: you've seen with portfolio companies, what you've seen with your investments,
Speaker 1: is that valid?
Speaker 3: Yes, I think long term you can't argue with the
Speaker 3: long term deflationary impact of technology and AI that is
Speaker 3: out there now, whether that's six twelve, eighteen, twenty four months,
Speaker 3: there's a massive deflationary impact from that activity. I just
Speaker 3: don't think it's on the center of the plate right
Speaker 3: now in the markets. It's out there, and I think
Speaker 3: that you're fighting with short term still supply interruptions, hiring interruptions,
Speaker 3: and some short term challenges that are inflationary versus a
Speaker 3: long term backdrop of deflationary trends because of AI around
Speaker 3: the globe. I think that's sort of the center converge.
Speaker 3: When I'm back here in twenty twenty six and twenty
Speaker 3: twenty seven, I think rates will probably be a bit
Speaker 3: lower because of the technology impact. But I think in
Speaker 3: the next six to nine months. I don't think rates
Speaker 3: are going to be dramatically lower.
Speaker 2: If you'd taken six months OFLF and came back to
Speaker 2: work and look where the market was, I don't think
Speaker 2: you'd have a clue when I think it happened here.
Speaker 2: Equity's close to all time highs, credit spreads are very tight.
Speaker 2: It's not a market is screaming count for rate cuts.
Speaker 2: From your standpoint at Apollo, when you look at valuation, underwriting,
Speaker 2: any red flags getting your attention, that's all at the moment.
Speaker 3: You know, the me is amazingly resilient in the US.
Speaker 3: When I was here three or four months ago, there
Speaker 3: was concern, handeringing about the trajectory of the economy. There
Speaker 3: was handeringing about non US investors, global investors investing in
Speaker 3: the US. I've been all around the world the last
Speaker 3: twelve weeks. American exceptionalism is front and center. Back you
Speaker 3: talk about where valuations are and levels of equities and raids,
Speaker 3: they're back. Global investors want to invest in the US.
Speaker 3: They made a lot of noise. They thought they were
Speaker 3: going to diversify themselves away, and they realized that breadth
Speaker 3: and depth and the strength of the US economy and
Speaker 3: the scale of what they need to invest, and the
Speaker 3: US is the primary place to invest. It still is,
Speaker 3: so you know, it's sharing as I was in Europe
Speaker 3: a few weeks ago as well, your folks, I want
Speaker 3: to talk about that. Amazingly is going on in Germany
Speaker 3: right now. The reality is public markets are the narrative,
Speaker 3: but private capital drives the economy and we're seeing it.
Speaker 3: We've been amazingly active. Edm F last week a louto
Speaker 3: matica what's going on in a variety of financing. So
Speaker 3: it's been a very very busy time, but I'm not
Speaker 3: seeing any red flags going off, and I really I
Speaker 3: want to make sure we talk today about this concern
Speaker 3: about the private capital private credit bubble versus just an
Speaker 3: economic cycle. We're due for a credit cycle, but that
Speaker 3: does not mean it's a bubble and private capital is
Speaker 3: playing a bigger and bigger role. Look what we did
Speaker 3: last week for ED and F in the UK and
Speaker 3: Germany four and a f billion dollars strowing private capital
Speaker 3: financing long duration debt to finish out their nuclear power
Speaker 3: plant build. Really really important that we're playing that role.
Speaker 2: Well, sit in Europe, let's just stay there. Off the
Speaker 2: back of your travel. So you mentioned AD and F
Speaker 2: big staling transaction. Also big target from you and the
Speaker 2: team to invest was it one hundred billion in Germany
Speaker 2: over the next ch title set.
Speaker 3: If you're a leadership of journey right now, your goal
Speaker 3: is to get a four trillion economy to a six
Speaker 3: trillion economy, and you are I was with the administration.
Speaker 3: You can talk to Murz. You know, they really are
Speaker 3: the role of private capital along with government spending over
Speaker 3: the next five or ten years.
Speaker 2: They've been so dependent on the banking system in Europe
Speaker 2: for such a long time. Can they get away from that?
Speaker 2: Because I feel like I've been talking about this for
Speaker 2: more than a decade.
Speaker 3: Well, I think the evidence is hereto if you look
Speaker 3: at the last twenty four months and what's going on
Speaker 3: with the leading Italian banks. Look what's going on with HSBC,
Speaker 3: what's going on with Barkley's and Deutsche Bank. They're operating
Speaker 3: in a much different capital regime, with a focus on
Speaker 3: shareholder value, with a focus on roe and they're really,
Speaker 3: you know, not taking all the policy lending on their
Speaker 3: balance sheet like they had in the past. So they're
Speaker 3: actually operating the right way. What you didn't really see before.
Speaker 3: Is the government really embracing in Germany, in France, in
Speaker 3: the UK they want private capital to be part of
Speaker 3: the solution because they know the government balance sheets cannot
Speaker 3: do all that's needed in terms of the massive cappex
Speaker 3: of transmission, line of transportation, of AI, of data centers.
Speaker 3: They know they're behind. So if anything, this administration in
Speaker 3: the US, the memo they sent out about what's going
Speaker 3: on in the US and Europe stepping forward, European leadership
Speaker 3: has taken notice. Let there be no doubt. I go
Speaker 3: to Europe three four times a year. I've never been
Speaker 3: so embraced as we were three weeks ago in Germany
Speaker 3: and France about the role of private capital in this
Speaker 3: build out.
Speaker 4: How much is that driven by this US administration?
Speaker 3: A lot? I mean, it's clear that they know that.
Speaker 3: The European leadership has even if you look this morning
Speaker 3: about how they're stepping up on defense spending with NATO.
Speaker 3: So I think, you know, when I think about the
Speaker 3: globe right now, again, taros are a little bit off
Speaker 3: on the sidelines. They're part of the conversation. It's a
Speaker 3: question of how much, not if or when. And I
Speaker 3: do think they feel like there's a responsibility that they
Speaker 3: have for their citizens, because when you look at the
Speaker 3: last fifteen years and where the US has grown versus
Speaker 3: europe growth, it's startling. You know, when I got out
Speaker 3: a college a few decades ago, it was all about Japan.
Speaker 3: Japan was going to take over the world. It was
Speaker 3: all about Germany industrial taking over the world. That did
Speaker 3: not come to play. And I know they have a
Speaker 3: lot of catching up to do, and I just think
Speaker 3: it's a very very power now. You know, if you watch,
Speaker 3: if you listen, if you read the Draggy letter and
Speaker 3: what he put forth eighteen months ago, Now if they
Speaker 3: followed that all one hundred and fifty six pages in
Speaker 3: great detail, it would be a watershed economic opportunity. And
Speaker 3: I think parts of that will to come forth. But
Speaker 3: they're already making moves on securitization other activities. And to
Speaker 3: Jonathan's point, the European banks are a bit behind the
Speaker 3: US in terms of the fundamental focus on roe and
Speaker 3: shareholder return and capital efficiency, but I think they're I
Speaker 3: don't want to say they're catching up, but they're getting
Speaker 3: in line. Clearly.
Speaker 2: You've talked about macro paralysis in the past. I don't
Speaker 2: see any sign of paralysis when I urt site high
Speaker 2: yield issuance, when I look at activity, do you see
Speaker 2: paralysis at all?
Speaker 3: I don't. And back to this last topic. I mean,
Speaker 3: as you point out, at least a pointing out, the
Speaker 3: two big topics that they need to really deal with
Speaker 3: right now is the tariff on July ninth and the
Speaker 3: big beautiful bill. But we're not talking about that this point.
Speaker 3: We're talking about a FED chairman in nine months. And
Speaker 3: I look at everything through. What this president has been
Speaker 3: in the past is a real estate developer. It's all
Speaker 3: about location, location, location. The FED pick will be about loyalty, loyalty, loyalty.
Speaker 3: Let's not get confused. There isn't paralysis in the market.
Speaker 3: As I mentioned before, you know the public markets in
Speaker 3: the narrative, the private capital is really the driver of
Speaker 3: the economy. A lot of activity going on in the
Speaker 3: US on refinancing, in Europe, on the global industrial renaissance.
Speaker 3: So we are on pace to have our busiest quarter
Speaker 3: in origination we've had in a number of years, a
Speaker 3: tremendous amount of activity across our equity platform, our infrastructure platform,
Speaker 3: our credit platform. So I do think there was a
Speaker 3: lot of handeringing, as I said six six or three
Speaker 3: four months ago, and I think that's now on the sidelines,
Speaker 3: maybe not on the narrative, but certainly on activity.
Speaker 1: Is that activity in lieu of some of the deals
Speaker 1: activity that we were expecting. Was it sort of expected
Speaker 1: to be the deals and the IPOs and the big
Speaker 1: boom for the banks, and instead it's a Powell coming
Speaker 1: in and doing a lot of financing deals in the.
Speaker 3: Back Well, I think too. I think the beginning of
Speaker 3: the year, people projected that the busiest folks on Wall
Speaker 3: Street would have been the ECM equity capital markets teams
Speaker 3: and the M and A teams, And while they've both
Speaker 3: been busy, the busiest folks have been their rate hedging
Speaker 3: and derivative teams because of what's going on in the
Speaker 3: dollar and concern about tariffs and such. But it's an
Speaker 3: interesting back up. Even listening to your program this morning,
Speaker 3: the fundamental economy is doing fine. It's doing well, maybe
Speaker 3: not to the growth expectations that people had earlier this year,
Speaker 3: and will come out somewhere around a two percent growth
Speaker 3: with about three percent inflation. But whether it was Nvidia,
Speaker 3: whether it was Micron. You know, a lot of cappec
Speaker 3: still going, a lot of companies in the AI space
Speaker 3: raising tremendous amounts of capital at high valuations with long
Speaker 3: list of investors coming in, and the activity. As I
Speaker 3: said earlier, what's going on in Europe right now about
Speaker 3: that industrial renaissance. It's still going on. So again, I
Speaker 3: think there's the headlines and then there's the reality of
Speaker 3: the underlying economy and the role of private capital, which
Speaker 3: is a much much bigger, longer term story.
Speaker 5: How do you think you're going to decipher the reality
Speaker 5: versus the headlines? When it comes to New York City.
Speaker 5: You have a huge company here in New York and
Speaker 5: a lot of people are concerned about a democratic socialist
Speaker 5: becoming the mayor of the city.
Speaker 3: You know, it's probably one of the most complicated jobs
Speaker 3: in the world on the political stage in terms of
Speaker 3: bringing a variety of the five boroughs together, the business,
Speaker 3: the community, the unions, all the folks that make New
Speaker 3: York the special place it is. As I've mentioned before,
Speaker 3: three out of every hundred college graduates a year come
Speaker 3: to New York. In the US, it's still the magnet
Speaker 3: of talent and ambition. Uh So when you see somebody
Speaker 3: that on the surface does not appear to have a
Speaker 3: long resume of leadership and making tough decisions, really concerning.
Speaker 3: And I think that we'll see now just winning the primary.
Speaker 3: While in the past it might have been the litmus
Speaker 3: test for being the mayor, I think there's still a
Speaker 3: long time coming until November.
Speaker 6: Build down the office in Florida. You're hearing.
Speaker 4: There was a diplomatic response.
Speaker 3: We are resid we we are, we are, we are
Speaker 3: a New York company, got we we are. We are
Speaker 3: determined to be here. I'm determined to be here. Our
Speaker 3: leadership is determined to be here. We have people in
Speaker 3: the office five days a week, is running. You know.
Speaker 6: It's uh, Jim, It's good to see you. Happy birthday,
Speaker 6: Jim Jelpless.
Speaker 2: Claims initial claims lower that expected, continuing claims higher than expected,
Speaker 2: and creeping higher over the past few months. From your
Speaker 2: advantage point, President Dadi, how much weight would you put
Speaker 2: on one versus the other and what's the labor market
Speaker 2: picture look like in your point of view your opinion, Well.
Speaker 7: The labor market shaping up to be solid, and the
Speaker 7: data today confirmed that now continuing claims are going up
Speaker 7: because it takes a little longer to find a job.
Speaker 7: That's consistent with the hiring numbers just being slower as
Speaker 7: the economy comes to a more sustainable pace. But when
Speaker 7: I look at the labor market, there are really no
Speaker 7: warning signs that it's weakening.
Speaker 6: Will continue to.
Speaker 7: Watch that, but right now it's progressing solidly, although more
Speaker 7: slowly than before.
Speaker 1: President Daily A lot of people have said that it
Speaker 1: is a data dependent federal reserve, and yet we haven't
Speaker 1: seen enough data to really understand or whether inflation is
Speaker 1: the primary objective or whether it really is some of
Speaker 1: the weakening that we've seen the labor market, albeit from
Speaker 1: a strong place. When will you have enough data to
Speaker 1: really make that determination.
Speaker 7: Well, one of the challenges of central banking that you
Speaker 7: just have to accept is that we never have perfect data,
Speaker 7: So you're always making judgments, and you want sufficient data
Speaker 7: to make a judgment that is really going to be
Speaker 7: best for the American people. So right now we have
Speaker 7: incoming information on the labor market which does not signal
Speaker 7: real weakness, It just signals slowing.
Speaker 4: So we'll continue to watch that, and.
Speaker 7: Then on inflation, the data have been good so far
Speaker 7: coming in If we were only backward looking, we would say, oh,
Speaker 7: it's time to adjust the interest rate. But we have
Speaker 7: to be forward looking, and then you have to make
Speaker 7: judgments about how you think inflation will shape up going forward.
Speaker 7: And they always really see three scenarios, and I'm leaning
Speaker 7: towards one, and I'll tell you more and more. But
Speaker 7: the one scenario, of course, is that it's just delayed.
Speaker 7: The tariffs are going to have some impact on inflation.
Speaker 7: It is after all, increasing costs, and that will be
Speaker 7: a more persistent effect. The second opportunity or possibility is
Speaker 7: that it's delayed but it will be a one off.
Speaker 7: And a third, of course, which I think is increasingly possible.
Speaker 7: It's not my modal, but it's increasingly possible, is that
Speaker 7: this just doesn't amount to as much as the models
Speaker 7: in history would tell us, because businesses find ways to
Speaker 7: absorb the costs and they split it down the production
Speaker 7: chain and ultimately consumers pay less of that. So I
Speaker 7: think those last two scenarios, it's delayed, but it's a
Speaker 7: one off, or it doesn't materialize to the extent that
Speaker 7: the models would suggest. Those are where you know, I'm
Speaker 7: putting increasing probabilities it will just have to collect some
Speaker 7: more information to make a decision. But you know, ultimately
Speaker 7: we can't wait for perfect information or we'll be behind
Speaker 7: and we can't do that to the American people.
Speaker 1: It sounds like President Dailier leaning toward a sooner rate
Speaker 1: cut if it is confirmed that this tariff impulse isn't
Speaker 1: as inflationary as people expected.
Speaker 4: Is that correct?
Speaker 6: Well, sooner than what?
Speaker 7: I mean, my modal outlook has been for some time
Speaker 7: that we would you begin to be able to adjust
Speaker 7: the rates in the fall, and I haven't really changed
Speaker 7: that view. It does seem like that. Of course, if
Speaker 7: the tariffs are one off, you can look through them,
Speaker 7: and if they're just not going to materialize, and you
Speaker 7: have to watch both sides of the mandate. And I
Speaker 7: think that's really important. It's not one or the other.
Speaker 7: It's both sides of our mandate that have really come
Speaker 7: into frame since we brought inflation down from the really
Speaker 7: high levels to something that's closer to our target. Ultimately,
Speaker 7: we have to watch both sides, and that's what I'm doing.
Speaker 7: And then the fall looks promising for a rate cut,
Speaker 7: I don't know for sure. I mean, we have to
Speaker 7: be open about what we don't know. Humble is I
Speaker 7: think the word that comes out of the inflation run
Speaker 7: up and so, but we will. You know, there's a
Speaker 7: lot of differences of views on the committee. I see
Speaker 7: that as real positive right now because people bring their
Speaker 7: perspectives and the data will guide us to what is
Speaker 7: the one that ultimately looks like reality.
Speaker 1: President Daily John was talking about the Palace intrigue, and
Speaker 1: I do wonder about how the increasingly political overlay to
Speaker 1: the FED has complicated your messaging, given that there is
Speaker 1: this debate about the dual mandate, etc.
Speaker 4: How much has it affected the way that you communicate?
Speaker 6: You know, not really.
Speaker 7: One of the things that I recognize on a regular
Speaker 7: basis is if I go out and talk to the
Speaker 7: people who live in the twelve Federal Reserve District, so
Speaker 7: that's nine states, very diverse states in the West, they
Speaker 7: don't actually bring this up at all. What they bring
Speaker 7: up is what do you think is going to happen
Speaker 7: to inflation? Will you be able to restore inflation to
Speaker 7: two percent? Will you be able to restore price stability?
Speaker 7: Do you think the labor market is going to be
Speaker 7: preserved during it? Because ultimately, I really want both jobs
Speaker 7: and lower inflation. I want to be able to get ahead,
Speaker 7: and so far, the people in my district are cautiously
Speaker 7: optimistic overall, thinking that the economy is weathering some of
Speaker 7: the worst concerns and the uncertainties, but continuing to move along.
Speaker 7: So cautiously optimistic is where where they are, and I
Speaker 7: think that reflects what's top of their mind, less about
Speaker 7: what's happening in Washington, and more about what's happening in
Speaker 7: their lived experience in their communities.
Speaker 1: So, President Daily, would you dismissed some of the discussions
Speaker 1: around shadow fed and all of that is simply palace
Speaker 1: intrigue and not necessarily affecting what would happen on the
Speaker 1: feder You're concerned about.
Speaker 3: That, you know.
Speaker 7: Ultimately, what I'm concerned about is the two mandates Congress
Speaker 7: gave us full employment, price stability. There's work to do there.
Speaker 7: That's where all of my focus is. And the Federal
Speaker 7: Reserve is an institution, it weather's a variety of different
Speaker 7: points in time. Ultimately, because we only think of one thing,
Speaker 7: how our work and further the American people in their
Speaker 7: lives and livelihoods, and how we do that through our
Speaker 7: congressionally mandated goals, So that's what we think about. We've
Speaker 7: had a durable history since nineteen thirteen, and I would
Speaker 7: consider that to be continuing to do our job well.
Speaker 6: President Addy.
Speaker 2: One argument we've heard to reduce interest rates sooner than
Speaker 2: maybe say the fall, as you indicated, is that basically
Speaker 2: the labor market right now is no longer a source
Speaker 2: for inflation, and with that in mind, there is space
Speaker 2: to reduce interest rates because the Fed beliefs that the
Speaker 2: policy rate is still restrictive. Does that not convince you
Speaker 2: enough right now?
Speaker 7: Not completely, because remember, inflation has been above our target
Speaker 7: for some time, well above our target during periods of time,
Speaker 7: and there's a sense where people really want us to
Speaker 7: get that down. Inflation is a tax on people, and
Speaker 7: every time we let people continue paying that tax, it
Speaker 7: erodes their well being. So I'm very focused on getting
Speaker 7: inflation down to two percent us. Being sure that we're
Speaker 7: on that sustainable path as long as the labor market
Speaker 7: doesn't show signs of weakening is really important. So you
Speaker 7: have to make a view. You have to have a
Speaker 7: view about what you think tariffs will do to inflation. Now,
Speaker 7: my own view is that they will potentially raise inflation
Speaker 7: that's my modal outlook, but they should dissipate over the period.
Speaker 7: It's not going to be something that builds into inflation expectations,
Speaker 7: and thus we really have to lean against it. But
Speaker 7: we can't just be assuming we know just because that's
Speaker 7: our modal outlook. We have to really collect the information
Speaker 7: and understand. Remember, data dependence isn't a backward looking activity,
Speaker 7: it's a forward looking activity. Right now, we're looking forward
Speaker 7: by talking to our contacts, and they still feel uncertain
Speaker 7: about what they will do. They're going to try to
Speaker 7: pass some along, but they, as a number of people
Speaker 7: you've had on your show have mentioned, firms don't have
Speaker 7: all those abilities, whether they're managing their brand or just
Speaker 7: they have exhausted consumers who can't take anymore. That's what
Speaker 7: we're waiting to find out. But I don't think we're behind.
Speaker 3: In our waiting.
Speaker 4: Policy in a good place.
Speaker 7: The economy is in a good place, and that's what
Speaker 7: we'll continue to monitor President daily.
Speaker 1: How much of a lesson was it last year when
Speaker 1: the FED cut by one hundred basis points only to
Speaker 1: see long term yields rise significantly in the face of
Speaker 1: growth and inflation expectations. Is that something that you worry
Speaker 1: about could happen now?
Speaker 7: You know, really, financial markets are an input to our
Speaker 7: to my decisions, not an output that I'm worrying about.
Speaker 7: And ultimately, you know, we want to see financial conditions
Speaker 7: align with what we're trying to do for the economy
Speaker 7: and we'll adjust as need it. But you know, we
Speaker 7: make policy. There's many things that affect yields. We make
Speaker 7: policy that we believe will be with the lags of
Speaker 7: monetary policy, supportive of both of our goals. And so
Speaker 7: I haven't I don't spend a lot of time wondering
Speaker 7: what the bond market will do, especially given there's so
Speaker 7: many things going on in the bond market right now.
Speaker 4: It's been quite volatile.
Speaker 7: So really it's about what did financial conditions overall do
Speaker 7: and what does that do to growth and activity and inflation?
Speaker 7: Does it restrain it or or support it? And that's
Speaker 7: that's where my focus is on input just present.
Speaker 2: Just want to squeeze this in. What would life be
Speaker 2: like with a permanent role in Washington, d C. Compared
Speaker 2: to say, San Francisco?
Speaker 6: How would that feel hotter?
Speaker 7: But seriously, you know, one of the things that I've
Speaker 7: my experience with the Federal Reserve is you have to
Speaker 7: contribute from wherever you sit. And that's what we all
Speaker 7: do when we get around that table. There's nineteen of us,
Speaker 7: and we don't think about who is in what role.
Speaker 3: It's really how do.
Speaker 7: We debate, discuss, bring our best thinking and our best
Speaker 7: disagreement to bear so we can make right decision at
Speaker 7: the right moment for the people we serve.
Speaker 6: President dealily, appreciate your time. Very diplomatic.
Speaker 2: Let's turn to NATO member countries agreeing to a defense
Speaker 2: spending target of five percent of GDP. Mike Schumacher of
Speaker 2: Wells Fargo writing, just say no to thirty year bonds.
Speaker 2: Rising defense spending means heavier issuance, meaning pressure on the
Speaker 2: long end.
Speaker 6: Mike joins us now for more might Welcome.
Speaker 2: To the program Sir, provocative piece, and I think a
Speaker 2: lot of people will agree with you and Mike. The
Speaker 2: interesting thought that you and the team have god, is
Speaker 2: this is not just the United States. This seems to
Speaker 2: be a global story.
Speaker 3: It is, joannal. We think it's got legs.
Speaker 8: See you think about a secular shift in defense spending.
Speaker 8: We're talking probably five ten years something like that. It's
Speaker 8: going to have a long time to go, and I
Speaker 8: get it. There's a lot of skepticism. People say, well,
Speaker 8: NATO's target's been two percent for a long time, how
Speaker 8: many countries have actually hit that? Not many would they
Speaker 8: go to a three point five percent or five percent,
Speaker 8: Maybe they don't get there, But really the point is
Speaker 8: they go up in terms of spending, and I think
Speaker 8: most countries probably ratchet. They're spending up in the next
Speaker 8: couple of years. So if your runway is two or
Speaker 8: three years, you say, well, if your average NATO country
Speaker 8: boosts defense spending by zero point five percent of GDP
Speaker 8: through the math, that's a lot of bonds. We think,
Speaker 8: a lot of long term debt, and I doubt that
Speaker 8: it's fully priced.
Speaker 1: A lot of people have pushed back on the argument
Speaker 1: that issuance matters, and I know that this is sort
Speaker 1: of the popular idea, and yet in the US it
Speaker 1: hasn't because we've increased our debt dramatically in periods where
Speaker 1: we saw rates at near zero.
Speaker 4: So I'm just wondering at what point, what.
Speaker 1: Sort of the tipping point where people become bond vigilantes
Speaker 1: and pay attention to issuance rather than just inflation.
Speaker 8: Yeah, it's interesting. I think issuance does matter. So think
Speaker 8: about not just nominal rates, but real rates. I agree
Speaker 8: inflation is high, that's why you've got high break evans.
Speaker 8: But think about your nominal interest rate. Decompose that break
Speaker 8: even inflation real rate. I'll give you a couple numbers. So,
Speaker 8: in the decade prior to COVID, the average real rate
Speaker 8: on a ten year Treasury was forty basis points four zero.
Speaker 8: Today it's about two percent. That's a massive premium. Issuance
Speaker 8: does matter. So the market's saying, look, we've got the US,
Speaker 8: which is profligate. It's got six percent something budget deficit,
Speaker 8: a lot of bonds to come out, we have to
Speaker 8: charge a relatively high penalty. So I think the market's
Speaker 8: been opposing that for a while.
Speaker 5: Germany is considering this fifty year bond. Mike, who's best
Speaker 5: position to tap their debt markets when it comes to
Speaker 5: this defense spending.
Speaker 3: Ooh, fifty years tough.
Speaker 8: I remember when the US talked about a fifty year
Speaker 8: back in the first Trump administration. I personally hold probably
Speaker 8: forty or fifty clients. How many buyers do we find?
Speaker 3: Zero?
Speaker 8: So perhaps the Germans have more luck today, But I
Speaker 8: think when you look at really long term debt it's tough.
Speaker 8: But I would say in general, whether it's a fifty
Speaker 8: year or a thirty year, the countries that are best
Speaker 8: positioned are the ones that are starting with a relatively
Speaker 8: low budget deficit and low issues. Germany is the obvious example.
Speaker 8: When you think about the outstanding volume of boons, it's
Speaker 8: less than two trillion dollars. Just to put that in
Speaker 8: contact treasuries, you've got twenty four trillion Germany as a
Speaker 8: pristine credit rating. Germany will find buyers for long term
Speaker 8: debt relative to other countries, but probably has to focus
Speaker 8: more on twenty and thirty or less on fifty.
Speaker 1: In my opinion, what is the idea of higher rates
Speaker 1: for longer What does that do to valuations over a
Speaker 1: longer time. We've already seen what that's done to the
Speaker 1: housing market and sort of the stasis that sits there.
Speaker 1: But do you expect equity returns globally to be substantially
Speaker 1: lower over the next five years, ten years because of
Speaker 1: rates that are permanently sort of pegged at a higher level.
Speaker 8: It probably makes people think about that trade off a
Speaker 8: bit more carefully and It's interesting. We used to do
Speaker 8: a lot of comparisons between the equity risk premium and
Speaker 8: bond yields. The problem is that model has shown the
Speaker 8: equity market, whether it's the US or elsewhere, to be
Speaker 8: rich for a long time. But I do think that
Speaker 8: if bond yields are persistently high. So let's say that
Speaker 8: the quote average rate on a US tenure for the
Speaker 8: next five or ten years is three and a half
Speaker 8: four percent instead of two something, does that impact the
Speaker 8: equity market?
Speaker 3: Probably?
Speaker 8: Is it something people can trade today, I don't think so,
Speaker 8: But when you consider longer term allocations, it probably does
Speaker 8: play a role and probably eventually makes bonds more attractive.
Speaker 7: Mike.
Speaker 5: Some of the naysayers that NATO, though, we're saying that
Speaker 5: this defense spending, this five percent target of GDP is
Speaker 5: only because Trump is there, he has a four year term.
Speaker 5: How much of this analysis you have on only because
Speaker 5: Trump's president and then potentially in four years they're not
Speaker 5: going to reach even close to that spending.
Speaker 8: That's a great point. That's why we focus really just
Speaker 8: on the next few years. So for US, we'd say, look,
Speaker 8: Trump is going to harangue NATO members to spend more
Speaker 8: on defense. That's pretty clear. He's done it already. He's
Speaker 8: been successful. Look at Canada, it's going to spend two
Speaker 8: percent of GDP on defense in the upcoming fiscal year
Speaker 8: after being one three or one five something like that.
Speaker 8: So he's already getting that done. So for US, it's
Speaker 8: not so much about what happens in twenty thirty or
Speaker 8: twenty thirty five when who knows as the US president.
Speaker 8: But if you think about the path for the next
Speaker 8: two to three years, when Trump will be very visible,
Speaker 8: very loud, I think it's reasonable to say that most
Speaker 8: countries in NATO will ratch up there spending quite a bit.
Speaker 8: So for US, that's the big impact on the markets.
Speaker 8: It's much less about what happens in the out years.
Speaker 2: My quick final question a question I think we'll ask
Speaker 2: a few times this morning. If the next FED share
Speaker 2: is a White House puppet, do we have to introduce
Speaker 2: some kind of em premium to the long.
Speaker 6: End of the curve?
Speaker 8: Yeah, I'm skeptical about that, John, And here's why. When
Speaker 8: you think about the nominee, it's pretty clear if people
Speaker 8: want to act a bit dubbish to try to get
Speaker 8: that job, to get the interview to.
Speaker 3: Get the nomination.
Speaker 8: But once the FED share is in place, how much
Speaker 8: control does the president actually have?
Speaker 3: Not much?
Speaker 8: It was a great point. Powell's a Trump nominee, trump appointee.
Speaker 8: Can Trump really control what he does? No, So, if
Speaker 8: it's Kevin Hassett or if it's Waller, who gets the job.
Speaker 8: Once that person's in the seat, once that person's been confirmed,
Speaker 8: I think he or she is going to take his
Speaker 8: own direction. So I'm not super concerned about that right now,
Speaker 8: but I think the markets might overreact between now and
Speaker 8: September October, whenever that nomination comes out.
Speaker 2: I appreciate the input. My thank you, Sir, Mike Sheen macroflasfanco.
Speaker 6: Joining us NAS.
Speaker 2: Nita Richardson of ADP NATI, Good morning, Ernie. You and
Speaker 2: others have talked about this so called loachha and dynamic
Speaker 2: in this labor market. Is it getting harder to get
Speaker 2: a job?
Speaker 9: It is, and it is especially for new graduates. We've
Speaker 9: seen that be in a predominant story. So what companies
Speaker 9: are doing is they're taking a pause on welcoming.
Speaker 4: Younger workers into the workforce.
Speaker 9: They're taking a pause on hiring, maybe even hiring senior roles.
Speaker 9: They're still in that weight and see mode a slowdown
Speaker 9: in the hiring the momentum that we saw at the
Speaker 9: beginning of the year.
Speaker 4: Can there be this.
Speaker 1: Low turn type of dynamic for a really prolonged period
Speaker 1: of time without there being some at least perceived weakness
Speaker 1: in the labor market. That becomes reality.
Speaker 9: You know what, it's interesting how concentrated hiring has become.
Speaker 9: If you look at that last government report, what you
Speaker 9: see is ninety six percent of the hiring has come
Speaker 9: from healthcare and leisure and hospitality.
Speaker 4: Two thirds came from healthcare.
Speaker 9: There's a lot of company can do other than let
Speaker 9: go of a worker. One thing they can do is
Speaker 9: cut hours. Fifty five percent of workers in the United
Speaker 9: States are hourly. So we may not be seeing the
Speaker 9: slowdown in the initial job list claims numbers, but they
Speaker 9: are showing up in hours worked and I think that's
Speaker 9: a number to watch, continuing claims as a number to watch.
Speaker 9: And then the concentration of the employment that's coming mostly
Speaker 9: in a very non cyclical sector, a structural sector like healthcare,
Speaker 9: that's an indication that everybody else.
Speaker 1: Is in wait and see most You know, this is
Speaker 1: such a difficult market to get a hand around, because
Speaker 1: is it weakening or is it week? Is this normalizing
Speaker 1: or is this really problematic? And does it highlight potential
Speaker 1: crack to come. What's your take on that? What's the
Speaker 1: sort of tell.
Speaker 9: There's nothing normal about the economy that's not dynamic, especially
Speaker 9: a US economy.
Speaker 4: It feeds on dynamism.
Speaker 9: So I would read the labor market is as in
Speaker 9: a stasis. There's no movement, and that doesn't plan. You
Speaker 9: asked me if how long does this happen until we
Speaker 9: call it a weak market?
Speaker 4: Well, it shows up in productivity.
Speaker 9: If you have a labor market that's not dynamic, that
Speaker 9: is not you know, ingesting new talent, it is not
Speaker 9: moving and workers are going to higher paying jobs and
Speaker 9: being promoted. That feeds into the productivity numbers. And we
Speaker 9: saw that the last read on productivity was quite weak
Speaker 9: one point four percent. The power of exceptionalism comes from
Speaker 9: not just workers, but output per worker, and that's what's slowing.
Speaker 4: That's where you're going to see the weakness.
Speaker 5: First, Neil, you say it's harder to get a job,
Speaker 5: but is it easier to get fired?
Speaker 4: Right now? Are they the same?
Speaker 9: You know it can be are quite easy to get
Speaker 9: fired depending on what you do.
Speaker 5: I might take out some of like personal issues. Are
Speaker 5: people are companies laying people off?
Speaker 9: It doesn't look like that. It looks like people are
Speaker 9: holding on to their workers. And in fact we've seen
Speaker 9: at ADP and the data and the payroll data, not
Speaker 9: only are they holding on to existing workers, they're actually
Speaker 9: re hiring workers that have left and come back. And
Speaker 9: I think, I mean to your question, hiring has become
Speaker 9: more cautious. They change the composition. Employers are less likely
Speaker 9: to take a new bet.
Speaker 4: On a worker they don't know.
Speaker 9: They'd rather hire someone they do know who can onboard quickly,
Speaker 9: who is very efficient, or not hire at all. That's
Speaker 9: what we're seeing in the data, and that again feeds
Speaker 9: back into the lack of dynamism that we might be experiencing.
Speaker 5: I'm going to ask the question Jonathan always asks, if
Speaker 5: you're hired right now you have a job, are you
Speaker 5: going in and asking for pay rises?
Speaker 9: You're probably going in and asking for a pay raise, yes,
Speaker 9: and not getting it. So yeah, the ask is there,
Speaker 9: but the action is not. And you can see that
Speaker 9: in how our initial job switcher data is looking. Yes,
Speaker 9: you get a bump from switching jobs, but it's not
Speaker 9: the same bump that you would have gotten two years ago,
Speaker 9: and it's not the premium of getting that bump versus
Speaker 9: what your pay growth would have been if you stayed
Speaker 9: at your previous employer isn't really there. So yeah, you
Speaker 9: can ask, be careful how much you.
Speaker 2: Asked for Kate Poskin, Kate Paskin. I always say that,
Speaker 2: Kate Paskin. The companies don't want you to ask. Stay well,
Speaker 2: and they want to have that leverage. Get comfortable, not
Speaker 2: end enough.
Speaker 1: Yeah, keep asking because the firing rate isn't that high,
Speaker 1: So you know, go for it.
Speaker 6: Keep pushing.
Speaker 2: Mi McKay's going to keep pushing my mcas more tax
Speaker 2: for us. Mike, you wanted to focus on the trite numbers, right.
Speaker 10: Well, trade numbers and durable goods. There's a couple of
Speaker 10: interesting things here. The exports for the United States fell
Speaker 10: five point two percent. That is the most since the
Speaker 10: largest drop, shall we say, since twenty twenty. It isn't
Speaker 10: clear why that would be because for US goods have
Speaker 10: been dropping as the dollar drops. So this is in
Speaker 10: the trade business pretty much a story about exports not
Speaker 10: living up.
Speaker 5: Now on the.
Speaker 10: Durable goods side, we saw a rise of sixteen percent,
Speaker 10: which is the largest since two thy fourteen, an increase
Speaker 10: of sixteen point four percent, But it's almost all Boeing
Speaker 10: one hundred and fifty eight percent rise in Boeing non
Speaker 10: defense aircraft sales or orders during the month, and some
Speaker 10: mixed news underneath because factories, the stuff we normally think about,
Speaker 10: like machines and primary metals, fabricated products those rows, but computers,
Speaker 10: communications equipment, electrical equipment, and appliances all fell orders for
Speaker 10: those during the month, so it isn't clear exactly how
Speaker 10: strong durables are even though the headline number is pretty strong.
Speaker 6: My McKay appreciate the update. My thank you. Nada still
Speaker 6: with us.
Speaker 2: NATA wanted to tenci on the feder itself, just briefly,
Speaker 2: not as any of Deutsche Bank set. This is no uncertainty,
Speaker 2: he says. You can see in the forecast a lot
Speaker 2: of division. Do you hear and see a lot of division?
Speaker 9: Yeah, I think that's to be expected. When things are
Speaker 9: really bad are really good, you should see a lot
Speaker 9: of consensus. The gray areas or where it's hard to
Speaker 9: drive that consensus, and it really depends on whether you
Speaker 9: want as a policy maker to make a preentive move
Speaker 9: because you may think that the economy is weakening and
Speaker 9: rates are too restrictive, or you're still in wait and
Speaker 9: see mode and you can see that various actors are
Speaker 9: playing or responding to different parts of the economy. It's
Speaker 9: like we all are looking at a puzzle with missing pieces,
Speaker 9: and you're trying to figure out what's in the center
Speaker 9: of that puzzle, and you don't have the pieces at
Speaker 9: the ready, and those pieces probably won't materialize for months
Speaker 9: and in.
Speaker 4: Some cases years.
Speaker 9: If you're talking about long term capital investments, so you're guessing,
Speaker 9: you're guessing what the center of the economy is. You're
Speaker 9: guessing about policy over the next six months, over the
Speaker 9: next even six years. Because many companies that are manufacturers
Speaker 9: are making tenure investments, not three month investments.
Speaker 2: Do they have sufficient information to sit there and say,
Speaker 2: we're forced to make a guess right now, and we've
Speaker 2: got to make a call.
Speaker 6: Is that as soon as July?
Speaker 2: Or can they keep on waiting because the chairman keeps
Speaker 2: saying we can wait the economy solid? Is the economy solid?
Speaker 9: If you're looking at the unemployment rate, you can go
Speaker 9: with a solid message. It has not budged in a
Speaker 9: couple of months and it's still quite low if you
Speaker 9: look at it historically. So there is a reason to wait.
Speaker 9: If you're looking at an economy where if you look
Speaker 9: at all the typical median projections, they are expecting slower growth,
Speaker 9: higher inflation, higher unemployment. If that is your forecast, you
Speaker 9: may want to make a preemptive move, and that's what
Speaker 9: some of the committee is doing.
Speaker 4: But overall the consensus looks.
Speaker 9: Like to wait and see, and they have the data
Speaker 9: support to do so.
Speaker 2: Nita, it's going to see. As always, Thank you nither
Speaker 2: Rich of them, there of ADP. This is the Bloomberg
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