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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.

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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along

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Speaker 2: with Lisa Bromwitz and A Marie Hordern. Join us each

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Speaker 2: day for insight from the best in markets, economics, and

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Speaker 2: geopolitics from our global headquarters in New York City. We

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Speaker 2: are live on Bloomberg Television weekday mornings from six to

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Speaker 2: nine am Eastern. Subscribe to the podcast on Apple, Spotify

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Speaker 2: or anywhere else you listen, and as always on the

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Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Liz john Thomas

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Speaker 2: a so far writing twenty twenty five can be positive

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Speaker 2: for business or be it less room for runaway stock

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Speaker 2: returns At these valuation levels and high earnings expectations reevaluate

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Speaker 2: the opportunities for buying. There's plenty out there, not at

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Speaker 2: all time highs. Liz joins us now for more. Liz,

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Speaker 2: good morning and happy New year. Let's talk about those

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Speaker 2: opportunities elsewhere where are they?

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Speaker 3: Sure? Well?

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Speaker 4: Then you excuse me when you look get their earnings

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Speaker 4: picture for twenty twenty five. There are some pretty big

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Speaker 4: reversals that are expected, and I think investors need to

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Speaker 4: pay attention to that. We get so obsessed with this

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Speaker 4: tech trade and focusing on whether or not we should

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Speaker 4: be in a handful of tech names or all of tech,

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Speaker 4: or certain.

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Speaker 3: Parts of tech.

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Speaker 4: But the second best sector in the SMP for earnings

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Speaker 4: growth is actually expected to be healthcare this year. And

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Speaker 4: then you look at things like materials industrials that are

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Speaker 4: going to see these big reversals from what their results

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Speaker 4: were last year. So I think there are opportunities out

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Speaker 4: there that are not trading at all time highs.

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Speaker 5: How much are these opportunities torpedo if yields don't necessarily

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Speaker 5: come down?

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Speaker 4: Well, so the question about yields, we know that this

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Speaker 4: four and a half percent level on the tenure has

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Speaker 4: been really critical to the.

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Speaker 3: Equity markets at large.

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Speaker 4: You'd start getting to that four and a half percent level,

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Speaker 4: markets at large, indices at large start to struggle when

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Speaker 4: you're looking at the growth trade. So just a straightforward

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Speaker 4: growth trade, that's what's going to get hit first and hardest,

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Speaker 4: largely because a lot of those multiples have expanded so

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Speaker 4: much over the last two years, but also because when

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Speaker 4: you just think about the discount rate, this is rational

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Speaker 4: for markets as yields rise the discount rate rises, which

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Speaker 4: means that what you're willing to pay for a stock

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Speaker 4: today is lower.

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Speaker 3: Than what it would be if that discount rate was lower.

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Speaker 4: So yields should put pressure on some of those growth names.

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Speaker 4: That being said, I think investors are going to start

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Speaker 4: looking for opportunities, growth of opportunities in different places, and

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Speaker 4: some of those places might be pharma and biotech. Healthcare

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Speaker 4: really legged the index last year. There's a lot of

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Speaker 4: bad news priced in, bad expectations priced into healthcare right now.

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Speaker 4: I think they're priced for a good opportunity in twenty

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Speaker 4: five if investors need other growth options.

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Speaker 5: Liz, when you talk to investors, how receptive are they

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Speaker 5: to this message? Or basically you've either had big techs

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Speaker 5: that have continued to outperform or people are getting a

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Speaker 5: little bit nervous and everything has just gotten a little

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Speaker 5: bit elevated and want to hide out in T bills.

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Speaker 5: I mean, how much are people willing to sort of

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Speaker 5: look into the nuance at a time where some people

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Speaker 5: are worried about peak sentiment.

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Speaker 4: Well, I think peak sentiment probably happened post election, and

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Speaker 4: we baked in a lot of this optimism, but without

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Speaker 4: policy clarity. So now we've gotten to a more rational level,

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Speaker 4: we've had this little pullback. We've ended the year on

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Speaker 4: a bumpy note. We sort of started the year on

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Speaker 4: a bumpy note because we know that we need more clarity,

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Speaker 4: we need more answers in order to actually trade those

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Speaker 4: stocks for the long term. So how much are people

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Speaker 4: looking into the nuance? I don't think so much yet,

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Speaker 4: because we're in this waiting game between now an inauguration,

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Speaker 4: now and when the cabinet goes in place now and

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Speaker 4: when we have actual clarity on some of.

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Speaker 3: These big policies.

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Speaker 4: Also, when you look at a market that is so

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Speaker 4: driven by momentum, people aren't looking at the nuances. We're

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Speaker 4: looking at the momentum trade. We're looking at where sentiment

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Speaker 4: is driving things. And a lot of times in those

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Speaker 4: environments you have this fomo attitude and that does.

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Speaker 3: Ignore a lot of the nuances.

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Speaker 4: So I think as time goes on, and if tech

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Speaker 4: continues to come under some pressure, and if there is,

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Speaker 4: you know, perhaps a slow down in earning's growth, a

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Speaker 4: slow down in the optimism, which doesn't necessarily mean a

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Speaker 4: pull back, but just a slow down in the optimism,

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Speaker 4: investors will start to look outside and have to be

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Speaker 4: more nuanced about it. I think profit margins and earnings

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Speaker 4: are going to be a really critical factor in investing

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Speaker 4: this year, Liss.

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Speaker 6: When you talk about policy clarity, have you gotten any

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Speaker 6: clarity over the past forty eight hours from Washington and

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Speaker 6: mar Lago when it comes to the one big, beautiful

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Speaker 6: bill and hopefully getting it done by May.

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Speaker 3: We've gotten a little.

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Speaker 4: But as you guys mentioned earlier in the show, the

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Speaker 4: market doesn't seem all that upset by it at this point.

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Speaker 4: I don't think, first of all, it's a surprise to

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Speaker 4: say that we're going to see more tariffs this year.

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Speaker 4: I think we know that, but we still don't know

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Speaker 4: exactly when that's going to happen, how much it's going

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Speaker 4: to happen, and all the different places where it might

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Speaker 4: actually impact market. So again, it's sort of just reinforces

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Speaker 4: we're still in this waiting game. Things are proposals right now,

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Speaker 4: they're not signed in, they're not affecting stocks at this point.

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Speaker 3: Now.

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Speaker 4: Of course, as they become more and more realistic, the

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Speaker 4: stock market will price that.

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Speaker 3: In ahead of time.

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Speaker 4: But I think the message of today is that, Okay,

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Speaker 4: we know there's going to be more tariffs coming. Maybe

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Speaker 4: the message is a little bit different than what we

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Speaker 4: thought two weeks ago, but it's still tariffs and we're

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Speaker 4: still not sure, so we have to wait a little

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Speaker 4: bit longer.

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Speaker 6: Well, if it's still terrorsts regardless, even if they're more narrow,

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Speaker 6: is it now time for companies essentially raise prices.

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Speaker 4: I don't think that companies are going to get away

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Speaker 4: with raising prices as much as they have over the

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Speaker 4: last few years, because consumers now realize that inflation has

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Speaker 4: come down. It was easier to pass through those costs

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Speaker 4: and those price increases when inflation was rising wage growth

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Speaker 4: was rising.

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Speaker 3: Now we've got cooling wage growth.

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Speaker 4: We've got CPI and PCE numbers that most people understand,

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Speaker 4: or at least at a lower level than they were.

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Speaker 4: Certainly not deflationary, but at a lower level than they were.

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Speaker 4: So it's more difficult to justify a pricing pass through

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Speaker 4: even with a tariff change.

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Speaker 5: Liz, can you help us with the week ahead? We

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Speaker 5: have one hundred and nineteen billion dollars of dead auctions.

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Speaker 5: We have the key labor report that comes out on Friday,

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Speaker 5: with the expectation of one hundred and sixty thousand jobs

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Speaker 5: printed in December, and then we have the potential for

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Speaker 5: truth postings or any other utterances around the Trump camp.

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Speaker 5: Of those three which were most important for.

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Speaker 4: You, I'm focused on the jobs report. We also have

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Speaker 4: jolts this week. So when you look at just what

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Speaker 4: the market had been focused on through most of twenty

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Speaker 4: twenty four, it was jobs. We had turned our focus

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Speaker 4: to the jobs market because it seemed as if inflation

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Speaker 4: had been largely defeated. Now we've got this environment where

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Speaker 4: jobs are still very important. Inflation has again become very important.

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Speaker 4: So this week the story is going to be about jobs.

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Speaker 4: I don't expect there to be any big surprises yet.

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Speaker 4: I think what everybody is watching for is to make

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Speaker 4: sure that we're still.

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Speaker 3: Expanding the labor market.

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Speaker 4: But one of the tenets of our twenty twenty five

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Speaker 4: outlook is that we have low churn.

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Speaker 3: In the labor market right now. And what I mean

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Speaker 3: by that.

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Speaker 4: Is low hiring, low quits, which means people just aren't

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Speaker 4: moving around quite as much. So this idea of adding

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Speaker 4: a ton of jobs every month, I don't think is

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Speaker 4: something that investors are really looking for. What we're looking

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Speaker 4: for is just no real deterioration in the labor market,

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Speaker 4: because right now, as the Fed has mentioned, the labor

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Speaker 4: market is still resilient and it's pretty well balanced. So

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Speaker 4: what we need is for the labor market to stay

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Speaker 4: stable while the rest of some of these bumps in

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Speaker 4: the road figure themselves out.

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Speaker 2: We will get a lot of labor markets data this week,

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Speaker 2: including child's data tomorrow. Let's appreciate your time. It's going

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Speaker 2: to say, let's young tell us that of sofi. David Malpass,

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Speaker 2: writing in a wool streatch op ed, President Electrum was

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Speaker 2: right last week when he raised the red flag over

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Speaker 2: the debt limit. The outgoing government is leaving a Taylor

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Speaker 2: made debt crisis for mister Trump that complicates his work

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Speaker 2: to implement his mandate, cut taxes quickly and rebuild US strength.

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Speaker 2: David joins us now for more. David, welcome to the show.

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Speaker 2: So it's always good to catch out with you. I

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Speaker 2: just want to address that one line of the op

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Speaker 2: ed a Taylor made debt crisis. Can you just explain

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Speaker 2: that a little bit more.

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Speaker 7: That's right, this has been coming on for a year,

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Speaker 7: for two years.

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Speaker 1: That kind of planned it so that the new president,

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Speaker 1: the next president would have the problem. So Congress spent

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Speaker 1: all the money, and so it's Taylor made for a

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Speaker 1: crisis because if you don't raise the debt ceiling, you

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Speaker 1: have a default on the national debt. What I've wanted

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Speaker 1: them to consider is rewriting the debt limit so that

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Speaker 1: it actually works. You've got to stop the spending before

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Speaker 1: it happens, rather than after you've already spent it.

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Speaker 5: David, we heard over the weekend from my Johnson House

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Speaker 5: Speaker that there is going to be one big, beautiful

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Speaker 5: bill and it's going to probably come in April, and

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Speaker 5: it will be put through by reconciliation to get all

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Speaker 5: of Donald Trump's agendas in place. Where're speaking with Henrietta Trace,

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Speaker 5: she said this could expand the deficit by some five

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Speaker 5: trillion dollars. Do you think there is the will to

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Speaker 5: start to revise the debt ceiling debate and some of

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Speaker 5: these other issues to structurally reduce the deficit under the

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Speaker 5: Trump administration.

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Speaker 1: I think there's a strong will to reduce spending. One

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Speaker 1: of the things going on is Biden is leaving the

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Speaker 1: copboard bear as he leaves office. That means they've spent

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Speaker 1: up as much as they can on the current fiscal year.

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Speaker 7: They've also they're in the.

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Speaker 1: Process of obligating every day that goes by. They're obligating

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Speaker 1: huge amounts of money that can't be gotten back through

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Speaker 1: the recision process. So if you make a grant and

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Speaker 1: you obligate the funds, you can't get them back.

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Speaker 7: And then another way that they've.

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Speaker 1: The cupboard is bare, and then showing up in the

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Speaker 1: bond market is they've kept the issuance of debt short term.

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Speaker 1: So one of the biggest decisions facing the new administration

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Speaker 1: will be what maturity to issue at and does the

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Speaker 1: Federal Reserve buy back all of the long term debt?

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Speaker 7: You know, the Fed is this giant hedge fund.

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Speaker 1: It's owning all of the long maturity are a big

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Speaker 1: chunk of the long maturity bonds. So I think over

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Speaker 1: the last three months they've lost maybe six hundred and

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Speaker 1: fifty billion.

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Speaker 7: Dollars just on having a bad bond trade.

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Speaker 1: You know, yields have gone up, so they're the big

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Speaker 1: holder of long term yields. So the consumer feels okay,

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Speaker 1: but the government itself is losing massive amounts of money

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Speaker 1: until they find a way to slow down the spending machine.

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Speaker 3: Do you think.

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Speaker 5: Just to sort of build on that, David, that the

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Speaker 5: reason why we've seen that rise in longer term yields

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Speaker 5: is because of the death said, is this truly the

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Speaker 5: bond vigilantes coming back to the table.

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Speaker 7: There's some of that.

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Speaker 1: The market looks ahead and says is do you have

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Speaker 1: a mechanism to actually control yourself?

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Speaker 7: And so that you know, the bond yields are having

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Speaker 7: multiple problems. One is the Fed's models are really broken.

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Speaker 7: So the Fed is basically saying, if.

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Speaker 1: You have more growth in the economy, we assume it

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Speaker 1: will be inflationary, and so we will have higher interest rates.

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Speaker 7: So it's a broken models problem.

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Speaker 1: But then second, as I mentioned, the duration of the

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Speaker 1: government was held down. The FED was buying the treasury

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Speaker 1: issued some long term treasuries, but then the Fed bottom

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Speaker 1: back and so this is a major problem because you

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Speaker 1: have to get over the hump. You can do that

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Speaker 1: through confidence, and that means are you able to repeatably,

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Speaker 1: you know, over and over again. Cut spending. Do you

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Speaker 1: have a mechanism to act actually control what Washington spends.

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Speaker 7: That's yet to be seen, but I think they can

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Speaker 7: do it.

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Speaker 6: David, I don't really see any restraint right now with

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Speaker 6: the incoming Trump administration. President Trump talked about yesterday one

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Speaker 6: powerful bill, border security, energy policies, renewing Trump airor tax

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Speaker 6: cuts except making them better to include no tax on tips.

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Speaker 6: And we're talking about a president who spent eight trillion

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Speaker 6: dollars or edit eight trillion dollars to deficit during Trump

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Speaker 6: one point zero. So where do you see the appetite

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Speaker 6: of Trump to want to cut spending.

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Speaker 1: It's going to be a combination of increasing growth and

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Speaker 1: production within the economy and making the existing spending more efficient.

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Speaker 1: So if you get more from it and you have

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Speaker 1: fewer people but fewer.

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Speaker 7: Obligated funds, that's going to be the trick.

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Speaker 1: But I want to really put emphasis on this idea

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Speaker 1: of markets being forward looking and looking at the output

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Speaker 1: of the economy. If you can change the inner system

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Speaker 1: that means both the production but also the transmission of energy,

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Speaker 1: that's going to have a big downward effect on inflation.

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Speaker 1: The FED doesn't have that in its models that you know,

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Speaker 1: each of the Fed's models are broken. One is on

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Speaker 1: how you set interest rates. One is how you use

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Speaker 1: the balance sheet. You know they've used it very harmfully

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Speaker 1: in terms of the lost money.

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Speaker 7: And then third is their regulatory policy. The FED has

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Speaker 7: this massive control over.

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Speaker 1: Lending to small businesses and that hasn't been going well.

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Speaker 1: But that can be repaired and fixed. You get more output,

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Speaker 1: less inflation, and you can bring interest rates and bond.

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Speaker 2: Yields down, something you've talked about a few times, David.

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Speaker 2: We'll have this conversation again in the near future, I'm sure.

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Speaker 2: David Malpasta, the former World Bank President, the former New

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Speaker 2: York Fed President, built downly calling for the Central Bank

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Speaker 2: to improve its communication, writing The better the quality of

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Speaker 2: the Fed's communication, the more accurately market participants can assess

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Speaker 2: how policy is likely to change. This tightens the linkage

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Speaker 2: between monetary policy actions and financial conditions, which increases the

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Speaker 2: speed and precision of monetary policy transmission. Bill John Justice

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Speaker 2: now for more. Bill, Welcome to the show, sir, and

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Speaker 2: a very happy new year to you. Where do you

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Speaker 2: think the FED is struggling to communicate right now? On

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Speaker 2: what issue specifically?

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Speaker 8: I think the smary economic projections last month was confusing

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Speaker 8: the people because there was a pretty big up for

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Speaker 8: revision to the inflation estimates for twenty twenty five, Yet

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Speaker 8: it was hard for pol to explain the sources of that.

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Speaker 8: He noted that the participants don't operate from a common

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Speaker 8: set of assumptions. Some were assuming effects of Trump tieroff

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Speaker 8: and deportation policies, some weren't, and some didn't say whether

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Speaker 8: they were or weren't. So each of the projections has

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Speaker 8: a different set of assumptions embedded in it, which makes

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Speaker 8: it very hard to anticipate what the FED thinks is

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Speaker 8: going to happen and how they're going to react to it.

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Speaker 5: Bill is the issue for the FED right now communication

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Speaker 5: or just not necessarily understanding which direction this economy is

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Speaker 5: going to go in.

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Speaker 9: Both.

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Speaker 8: I think the problem is they're having trouble communicating how

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Speaker 8: they're likely to react to the Trump policies.

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Speaker 9: Obviously, if terists are broad based, that is one effect.

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Speaker 8: If they're much more targeted, as the Watching Post report suggests,

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Speaker 8: that has a different implication. So there's a lot of

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Speaker 8: the I'm certainly about what Trump policies are going to be,

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Speaker 8: and of course the FED is uncertain about how the

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Speaker 8: economy itself is going to perform. You know, a key

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Speaker 8: issue for the FED in terms of the economy is

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Speaker 8: the labor market going to continue to weaken or not.

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Speaker 8: Has been very clear that he thinks the labor market

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Speaker 8: is still weakening and he doesn't want to weaken any further.

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Speaker 9: So that's why Friday's payroll and ployer report is so important.

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Speaker 5: When you talk about a reaction function. This has been

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Speaker 5: one of the big quag buyers for people. What is

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Speaker 5: sort of the scenario analysis that the FED is doing

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Speaker 5: and how they're going to respond to it. Do you

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Speaker 5: think that they have that scenario analysis or do you

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Speaker 5: think that increasingly, by default, it is becoming an increasingly

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Speaker 5: data point dependent federal reserve.

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Speaker 8: Well, there's definitely a scenario analysis that takes place before

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Speaker 8: each meeting. The staff prepares what's so called tealbook, and

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Speaker 8: in the Tealbook there's a baseline forecast, but there's also

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Speaker 8: these alternative simulations which suggests how the economy might evolve

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Speaker 8: if things happen differently.

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Speaker 9: I think that's another problem with the Summary of Economic Projections.

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Speaker 8: It's a modal forecast and it doesn't talk about at

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Speaker 8: all about what could happen if things turn out differently

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Speaker 8: than what FED officials expect. So I think one thing

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Speaker 8: the FED could do is actually do what a lot

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Speaker 8: of foreign central banks. Do is actually have a consensus forecast?

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Speaker 8: Difficult to do with a committee of nineteen people spread

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Speaker 8: all over the country, but you could actually start to

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Speaker 8: publish the staff forecast.

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Speaker 9: There is a staff forecast available before.

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Speaker 8: Every meeting, and if you put that out there, you

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Speaker 8: have a better sense of what the baseline assumptions of

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Speaker 8: the FED are.

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Speaker 3: But Bill isn't.

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Speaker 6: One of the issues that's problems is because they don't

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Speaker 6: want to or can't be seen talking about policy. Do

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Speaker 6: you just think the FED should be more open about

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Speaker 6: policy all of the members.

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Speaker 8: Well, clearly what happens on tarists and deportation is going

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Speaker 8: to have a big effect on the commy in twenty

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Speaker 8: twenty five, so I don't think you can avoid thinking

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Speaker 8: about that in terms of making your economic forecast. I

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Speaker 8: think the FED is reluctant to talk about it because

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Speaker 8: he doesn't want to get self engaged into this political discussion,

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Speaker 8: and I think they're worried that that will politicize the FED,

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Speaker 8: so they're trying to think about it with how talking

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Speaker 8: about it at the same time.

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Speaker 6: Is your main concern right now with the FED communications

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Speaker 6: or would you do anything differently on policy?

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Speaker 9: I think they are in a pretty good place right now.

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Speaker 8: I think that they understand that the commy is doing okay,

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Speaker 8: Inflation is a little bit sticky, so it makes sense

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Speaker 8: to wait. They also understand that there's a lot of

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Speaker 8: uncertainty about what policy is going to be forthcoming. And

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Speaker 8: then Paul said when things are uncertain, to slow down.

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Speaker 8: So I think that all makes a lot of sense.

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Speaker 8: I think the big disconnect I think between markets and

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Speaker 8: the FED is where is the FED heading over the

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Speaker 8: medium to longer term. The Fed says we're heading to

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Speaker 8: three percent federal funds rate. The market says we're heading

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Speaker 8: to something more like a four percent federal fund rate.

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Speaker 8: So there's a pretty big gap about what is a

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Speaker 8: neutral monitary policy. FED thanks the neutral manitary policy is

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Speaker 8: quite a bit easier than we are today. The market

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Speaker 8: thinks that the neutral manitary policy is slightly easier than

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Speaker 8: where we are today.

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Speaker 2: But what did you do with your own forecast when

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Speaker 2: you had Trump come aga? In Volume one? How did

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Speaker 2: you change things? Did you anticipate the changes to policy

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Speaker 2: beforehand or react once it was introduced.

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Speaker 9: I think I thought.

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Speaker 8: That there was more risk in the forecast, So I

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Speaker 8: think the biggest change for me was to talk about

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Speaker 8: risk and uncertainty going up. And I think that's what's

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Speaker 8: happened today. I mean, I think the big transition from

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Speaker 8: Biden to Trump is under Biden, we sort of knew

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Speaker 8: exactly what the policies were, and in fact, over the

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Speaker 8: last two years, there hasn't really been much in terms

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Speaker 8: of new policy initiatives. Now we're going into the Trump era,

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Speaker 8: you know there's going to be a lot changes in

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Speaker 8: policy and yet and we don't know yet they're what

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Speaker 8: they're going to be. So I think we're going from

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Speaker 8: a period of low uncertainty too much higher and certain in.

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Speaker 9: That's what's got to get priced into markets.

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Speaker 8: That's one reason why I think the bond market has

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Speaker 8: done poorly over the last few months.

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Speaker 2: Bill appreciate your time. As always built down to there,

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Speaker 2: the former New York Fed President, looking out to twenty

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Speaker 2: twenty five and beyond. This is the Bloomberg Surveillance podcast,

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Speaker 2: bringing you the best in markets, economics, angiopolitics. You can

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