Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and A Marie Hordern. Join us each
Speaker 2: day for insight from the best in markets, economics, and
Speaker 2: geopolitics from our global headquarters in New York City. We
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Speaker 2: or anywhere else you listen, and as always on the
Speaker 2: Bloomberg Terminal and the Bloomberg Business app. Liz john Thomas
Speaker 2: a so far writing twenty twenty five can be positive
Speaker 2: for business or be it less room for runaway stock
Speaker 2: returns At these valuation levels and high earnings expectations reevaluate
Speaker 2: the opportunities for buying. There's plenty out there, not at
Speaker 2: all time highs. Liz joins us now for more. Liz,
Speaker 2: good morning and happy New year. Let's talk about those
Speaker 2: opportunities elsewhere where are they?
Speaker 3: Sure? Well?
Speaker 4: Then you excuse me when you look get their earnings
Speaker 4: picture for twenty twenty five. There are some pretty big
Speaker 4: reversals that are expected, and I think investors need to
Speaker 4: pay attention to that. We get so obsessed with this
Speaker 4: tech trade and focusing on whether or not we should
Speaker 4: be in a handful of tech names or all of tech,
Speaker 4: or certain.
Speaker 3: Parts of tech.
Speaker 4: But the second best sector in the SMP for earnings
Speaker 4: growth is actually expected to be healthcare this year. And
Speaker 4: then you look at things like materials industrials that are
Speaker 4: going to see these big reversals from what their results
Speaker 4: were last year. So I think there are opportunities out
Speaker 4: there that are not trading at all time highs.
Speaker 5: How much are these opportunities torpedo if yields don't necessarily
Speaker 5: come down?
Speaker 4: Well, so the question about yields, we know that this
Speaker 4: four and a half percent level on the tenure has
Speaker 4: been really critical to the.
Speaker 3: Equity markets at large.
Speaker 4: You'd start getting to that four and a half percent level,
Speaker 4: markets at large, indices at large start to struggle when
Speaker 4: you're looking at the growth trade. So just a straightforward
Speaker 4: growth trade, that's what's going to get hit first and hardest,
Speaker 4: largely because a lot of those multiples have expanded so
Speaker 4: much over the last two years, but also because when
Speaker 4: you just think about the discount rate, this is rational
Speaker 4: for markets as yields rise the discount rate rises, which
Speaker 4: means that what you're willing to pay for a stock
Speaker 4: today is lower.
Speaker 3: Than what it would be if that discount rate was lower.
Speaker 4: So yields should put pressure on some of those growth names.
Speaker 4: That being said, I think investors are going to start
Speaker 4: looking for opportunities, growth of opportunities in different places, and
Speaker 4: some of those places might be pharma and biotech. Healthcare
Speaker 4: really legged the index last year. There's a lot of
Speaker 4: bad news priced in, bad expectations priced into healthcare right now.
Speaker 4: I think they're priced for a good opportunity in twenty
Speaker 4: five if investors need other growth options.
Speaker 5: Liz, when you talk to investors, how receptive are they
Speaker 5: to this message? Or basically you've either had big techs
Speaker 5: that have continued to outperform or people are getting a
Speaker 5: little bit nervous and everything has just gotten a little
Speaker 5: bit elevated and want to hide out in T bills.
Speaker 5: I mean, how much are people willing to sort of
Speaker 5: look into the nuance at a time where some people
Speaker 5: are worried about peak sentiment.
Speaker 4: Well, I think peak sentiment probably happened post election, and
Speaker 4: we baked in a lot of this optimism, but without
Speaker 4: policy clarity. So now we've gotten to a more rational level,
Speaker 4: we've had this little pullback. We've ended the year on
Speaker 4: a bumpy note. We sort of started the year on
Speaker 4: a bumpy note because we know that we need more clarity,
Speaker 4: we need more answers in order to actually trade those
Speaker 4: stocks for the long term. So how much are people
Speaker 4: looking into the nuance? I don't think so much yet,
Speaker 4: because we're in this waiting game between now an inauguration,
Speaker 4: now and when the cabinet goes in place now and
Speaker 4: when we have actual clarity on some of.
Speaker 3: These big policies.
Speaker 4: Also, when you look at a market that is so
Speaker 4: driven by momentum, people aren't looking at the nuances. We're
Speaker 4: looking at the momentum trade. We're looking at where sentiment
Speaker 4: is driving things. And a lot of times in those
Speaker 4: environments you have this fomo attitude and that does.
Speaker 3: Ignore a lot of the nuances.
Speaker 4: So I think as time goes on, and if tech
Speaker 4: continues to come under some pressure, and if there is,
Speaker 4: you know, perhaps a slow down in earning's growth, a
Speaker 4: slow down in the optimism, which doesn't necessarily mean a
Speaker 4: pull back, but just a slow down in the optimism,
Speaker 4: investors will start to look outside and have to be
Speaker 4: more nuanced about it. I think profit margins and earnings
Speaker 4: are going to be a really critical factor in investing
Speaker 4: this year, Liss.
Speaker 6: When you talk about policy clarity, have you gotten any
Speaker 6: clarity over the past forty eight hours from Washington and
Speaker 6: mar Lago when it comes to the one big, beautiful
Speaker 6: bill and hopefully getting it done by May.
Speaker 3: We've gotten a little.
Speaker 4: But as you guys mentioned earlier in the show, the
Speaker 4: market doesn't seem all that upset by it at this point.
Speaker 4: I don't think, first of all, it's a surprise to
Speaker 4: say that we're going to see more tariffs this year.
Speaker 4: I think we know that, but we still don't know
Speaker 4: exactly when that's going to happen, how much it's going
Speaker 4: to happen, and all the different places where it might
Speaker 4: actually impact market. So again, it's sort of just reinforces
Speaker 4: we're still in this waiting game. Things are proposals right now,
Speaker 4: they're not signed in, they're not affecting stocks at this point.
Speaker 3: Now.
Speaker 4: Of course, as they become more and more realistic, the
Speaker 4: stock market will price that.
Speaker 3: In ahead of time.
Speaker 4: But I think the message of today is that, Okay,
Speaker 4: we know there's going to be more tariffs coming. Maybe
Speaker 4: the message is a little bit different than what we
Speaker 4: thought two weeks ago, but it's still tariffs and we're
Speaker 4: still not sure, so we have to wait a little
Speaker 4: bit longer.
Speaker 6: Well, if it's still terrorsts regardless, even if they're more narrow,
Speaker 6: is it now time for companies essentially raise prices.
Speaker 4: I don't think that companies are going to get away
Speaker 4: with raising prices as much as they have over the
Speaker 4: last few years, because consumers now realize that inflation has
Speaker 4: come down. It was easier to pass through those costs
Speaker 4: and those price increases when inflation was rising wage growth
Speaker 4: was rising.
Speaker 3: Now we've got cooling wage growth.
Speaker 4: We've got CPI and PCE numbers that most people understand,
Speaker 4: or at least at a lower level than they were.
Speaker 4: Certainly not deflationary, but at a lower level than they were.
Speaker 4: So it's more difficult to justify a pricing pass through
Speaker 4: even with a tariff change.
Speaker 5: Liz, can you help us with the week ahead? We
Speaker 5: have one hundred and nineteen billion dollars of dead auctions.
Speaker 5: We have the key labor report that comes out on Friday,
Speaker 5: with the expectation of one hundred and sixty thousand jobs
Speaker 5: printed in December, and then we have the potential for
Speaker 5: truth postings or any other utterances around the Trump camp.
Speaker 5: Of those three which were most important for.
Speaker 4: You, I'm focused on the jobs report. We also have
Speaker 4: jolts this week. So when you look at just what
Speaker 4: the market had been focused on through most of twenty
Speaker 4: twenty four, it was jobs. We had turned our focus
Speaker 4: to the jobs market because it seemed as if inflation
Speaker 4: had been largely defeated. Now we've got this environment where
Speaker 4: jobs are still very important. Inflation has again become very important.
Speaker 4: So this week the story is going to be about jobs.
Speaker 4: I don't expect there to be any big surprises yet.
Speaker 4: I think what everybody is watching for is to make
Speaker 4: sure that we're still.
Speaker 3: Expanding the labor market.
Speaker 4: But one of the tenets of our twenty twenty five
Speaker 4: outlook is that we have low churn.
Speaker 3: In the labor market right now. And what I mean
Speaker 3: by that.
Speaker 4: Is low hiring, low quits, which means people just aren't
Speaker 4: moving around quite as much. So this idea of adding
Speaker 4: a ton of jobs every month, I don't think is
Speaker 4: something that investors are really looking for. What we're looking
Speaker 4: for is just no real deterioration in the labor market,
Speaker 4: because right now, as the Fed has mentioned, the labor
Speaker 4: market is still resilient and it's pretty well balanced. So
Speaker 4: what we need is for the labor market to stay
Speaker 4: stable while the rest of some of these bumps in
Speaker 4: the road figure themselves out.
Speaker 2: We will get a lot of labor markets data this week,
Speaker 2: including child's data tomorrow. Let's appreciate your time. It's going
Speaker 2: to say, let's young tell us that of sofi. David Malpass,
Speaker 2: writing in a wool streatch op ed, President Electrum was
Speaker 2: right last week when he raised the red flag over
Speaker 2: the debt limit. The outgoing government is leaving a Taylor
Speaker 2: made debt crisis for mister Trump that complicates his work
Speaker 2: to implement his mandate, cut taxes quickly and rebuild US strength.
Speaker 2: David joins us now for more. David, welcome to the show.
Speaker 2: So it's always good to catch out with you. I
Speaker 2: just want to address that one line of the op
Speaker 2: ed a Taylor made debt crisis. Can you just explain
Speaker 2: that a little bit more.
Speaker 7: That's right, this has been coming on for a year,
Speaker 7: for two years.
Speaker 1: That kind of planned it so that the new president,
Speaker 1: the next president would have the problem. So Congress spent
Speaker 1: all the money, and so it's Taylor made for a
Speaker 1: crisis because if you don't raise the debt ceiling, you
Speaker 1: have a default on the national debt. What I've wanted
Speaker 1: them to consider is rewriting the debt limit so that
Speaker 1: it actually works. You've got to stop the spending before
Speaker 1: it happens, rather than after you've already spent it.
Speaker 5: David, we heard over the weekend from my Johnson House
Speaker 5: Speaker that there is going to be one big, beautiful
Speaker 5: bill and it's going to probably come in April, and
Speaker 5: it will be put through by reconciliation to get all
Speaker 5: of Donald Trump's agendas in place. Where're speaking with Henrietta Trace,
Speaker 5: she said this could expand the deficit by some five
Speaker 5: trillion dollars. Do you think there is the will to
Speaker 5: start to revise the debt ceiling debate and some of
Speaker 5: these other issues to structurally reduce the deficit under the
Speaker 5: Trump administration.
Speaker 1: I think there's a strong will to reduce spending. One
Speaker 1: of the things going on is Biden is leaving the
Speaker 1: copboard bear as he leaves office. That means they've spent
Speaker 1: up as much as they can on the current fiscal year.
Speaker 7: They've also they're in the.
Speaker 1: Process of obligating every day that goes by. They're obligating
Speaker 1: huge amounts of money that can't be gotten back through
Speaker 1: the recision process. So if you make a grant and
Speaker 1: you obligate the funds, you can't get them back.
Speaker 7: And then another way that they've.
Speaker 1: The cupboard is bare, and then showing up in the
Speaker 1: bond market is they've kept the issuance of debt short term.
Speaker 1: So one of the biggest decisions facing the new administration
Speaker 1: will be what maturity to issue at and does the
Speaker 1: Federal Reserve buy back all of the long term debt?
Speaker 7: You know, the Fed is this giant hedge fund.
Speaker 1: It's owning all of the long maturity are a big
Speaker 1: chunk of the long maturity bonds. So I think over
Speaker 1: the last three months they've lost maybe six hundred and
Speaker 1: fifty billion.
Speaker 7: Dollars just on having a bad bond trade.
Speaker 1: You know, yields have gone up, so they're the big
Speaker 1: holder of long term yields. So the consumer feels okay,
Speaker 1: but the government itself is losing massive amounts of money
Speaker 1: until they find a way to slow down the spending machine.
Speaker 3: Do you think.
Speaker 5: Just to sort of build on that, David, that the
Speaker 5: reason why we've seen that rise in longer term yields
Speaker 5: is because of the death said, is this truly the
Speaker 5: bond vigilantes coming back to the table.
Speaker 7: There's some of that.
Speaker 1: The market looks ahead and says is do you have
Speaker 1: a mechanism to actually control yourself?
Speaker 7: And so that you know, the bond yields are having
Speaker 7: multiple problems. One is the Fed's models are really broken.
Speaker 7: So the Fed is basically saying, if.
Speaker 1: You have more growth in the economy, we assume it
Speaker 1: will be inflationary, and so we will have higher interest rates.
Speaker 7: So it's a broken models problem.
Speaker 1: But then second, as I mentioned, the duration of the
Speaker 1: government was held down. The FED was buying the treasury
Speaker 1: issued some long term treasuries, but then the Fed bottom
Speaker 1: back and so this is a major problem because you
Speaker 1: have to get over the hump. You can do that
Speaker 1: through confidence, and that means are you able to repeatably,
Speaker 1: you know, over and over again. Cut spending. Do you
Speaker 1: have a mechanism to act actually control what Washington spends.
Speaker 7: That's yet to be seen, but I think they can
Speaker 7: do it.
Speaker 6: David, I don't really see any restraint right now with
Speaker 6: the incoming Trump administration. President Trump talked about yesterday one
Speaker 6: powerful bill, border security, energy policies, renewing Trump airor tax
Speaker 6: cuts except making them better to include no tax on tips.
Speaker 6: And we're talking about a president who spent eight trillion
Speaker 6: dollars or edit eight trillion dollars to deficit during Trump
Speaker 6: one point zero. So where do you see the appetite
Speaker 6: of Trump to want to cut spending.
Speaker 1: It's going to be a combination of increasing growth and
Speaker 1: production within the economy and making the existing spending more efficient.
Speaker 1: So if you get more from it and you have
Speaker 1: fewer people but fewer.
Speaker 7: Obligated funds, that's going to be the trick.
Speaker 1: But I want to really put emphasis on this idea
Speaker 1: of markets being forward looking and looking at the output
Speaker 1: of the economy. If you can change the inner system
Speaker 1: that means both the production but also the transmission of energy,
Speaker 1: that's going to have a big downward effect on inflation.
Speaker 1: The FED doesn't have that in its models that you know,
Speaker 1: each of the Fed's models are broken. One is on
Speaker 1: how you set interest rates. One is how you use
Speaker 1: the balance sheet. You know they've used it very harmfully
Speaker 1: in terms of the lost money.
Speaker 7: And then third is their regulatory policy. The FED has
Speaker 7: this massive control over.
Speaker 1: Lending to small businesses and that hasn't been going well.
Speaker 1: But that can be repaired and fixed. You get more output,
Speaker 1: less inflation, and you can bring interest rates and bond.
Speaker 2: Yields down, something you've talked about a few times, David.
Speaker 2: We'll have this conversation again in the near future, I'm sure.
Speaker 2: David Malpasta, the former World Bank President, the former New
Speaker 2: York Fed President, built downly calling for the Central Bank
Speaker 2: to improve its communication, writing The better the quality of
Speaker 2: the Fed's communication, the more accurately market participants can assess
Speaker 2: how policy is likely to change. This tightens the linkage
Speaker 2: between monetary policy actions and financial conditions, which increases the
Speaker 2: speed and precision of monetary policy transmission. Bill John Justice
Speaker 2: now for more. Bill, Welcome to the show, sir, and
Speaker 2: a very happy new year to you. Where do you
Speaker 2: think the FED is struggling to communicate right now? On
Speaker 2: what issue specifically?
Speaker 8: I think the smary economic projections last month was confusing
Speaker 8: the people because there was a pretty big up for
Speaker 8: revision to the inflation estimates for twenty twenty five, Yet
Speaker 8: it was hard for pol to explain the sources of that.
Speaker 8: He noted that the participants don't operate from a common
Speaker 8: set of assumptions. Some were assuming effects of Trump tieroff
Speaker 8: and deportation policies, some weren't, and some didn't say whether
Speaker 8: they were or weren't. So each of the projections has
Speaker 8: a different set of assumptions embedded in it, which makes
Speaker 8: it very hard to anticipate what the FED thinks is
Speaker 8: going to happen and how they're going to react to it.
Speaker 5: Bill is the issue for the FED right now communication
Speaker 5: or just not necessarily understanding which direction this economy is
Speaker 5: going to go in.
Speaker 9: Both.
Speaker 8: I think the problem is they're having trouble communicating how
Speaker 8: they're likely to react to the Trump policies.
Speaker 9: Obviously, if terists are broad based, that is one effect.
Speaker 8: If they're much more targeted, as the Watching Post report suggests,
Speaker 8: that has a different implication. So there's a lot of
Speaker 8: the I'm certainly about what Trump policies are going to be,
Speaker 8: and of course the FED is uncertain about how the
Speaker 8: economy itself is going to perform. You know, a key
Speaker 8: issue for the FED in terms of the economy is
Speaker 8: the labor market going to continue to weaken or not.
Speaker 8: Has been very clear that he thinks the labor market
Speaker 8: is still weakening and he doesn't want to weaken any further.
Speaker 9: So that's why Friday's payroll and ployer report is so important.
Speaker 5: When you talk about a reaction function. This has been
Speaker 5: one of the big quag buyers for people. What is
Speaker 5: sort of the scenario analysis that the FED is doing
Speaker 5: and how they're going to respond to it. Do you
Speaker 5: think that they have that scenario analysis or do you
Speaker 5: think that increasingly, by default, it is becoming an increasingly
Speaker 5: data point dependent federal reserve.
Speaker 8: Well, there's definitely a scenario analysis that takes place before
Speaker 8: each meeting. The staff prepares what's so called tealbook, and
Speaker 8: in the Tealbook there's a baseline forecast, but there's also
Speaker 8: these alternative simulations which suggests how the economy might evolve
Speaker 8: if things happen differently.
Speaker 9: I think that's another problem with the Summary of Economic Projections.
Speaker 8: It's a modal forecast and it doesn't talk about at
Speaker 8: all about what could happen if things turn out differently
Speaker 8: than what FED officials expect. So I think one thing
Speaker 8: the FED could do is actually do what a lot
Speaker 8: of foreign central banks. Do is actually have a consensus forecast?
Speaker 8: Difficult to do with a committee of nineteen people spread
Speaker 8: all over the country, but you could actually start to
Speaker 8: publish the staff forecast.
Speaker 9: There is a staff forecast available before.
Speaker 8: Every meeting, and if you put that out there, you
Speaker 8: have a better sense of what the baseline assumptions of
Speaker 8: the FED are.
Speaker 3: But Bill isn't.
Speaker 6: One of the issues that's problems is because they don't
Speaker 6: want to or can't be seen talking about policy. Do
Speaker 6: you just think the FED should be more open about
Speaker 6: policy all of the members.
Speaker 8: Well, clearly what happens on tarists and deportation is going
Speaker 8: to have a big effect on the commy in twenty
Speaker 8: twenty five, so I don't think you can avoid thinking
Speaker 8: about that in terms of making your economic forecast. I
Speaker 8: think the FED is reluctant to talk about it because
Speaker 8: he doesn't want to get self engaged into this political discussion,
Speaker 8: and I think they're worried that that will politicize the FED,
Speaker 8: so they're trying to think about it with how talking
Speaker 8: about it at the same time.
Speaker 6: Is your main concern right now with the FED communications
Speaker 6: or would you do anything differently on policy?
Speaker 9: I think they are in a pretty good place right now.
Speaker 8: I think that they understand that the commy is doing okay,
Speaker 8: Inflation is a little bit sticky, so it makes sense
Speaker 8: to wait. They also understand that there's a lot of
Speaker 8: uncertainty about what policy is going to be forthcoming. And
Speaker 8: then Paul said when things are uncertain, to slow down.
Speaker 8: So I think that all makes a lot of sense.
Speaker 8: I think the big disconnect I think between markets and
Speaker 8: the FED is where is the FED heading over the
Speaker 8: medium to longer term. The Fed says we're heading to
Speaker 8: three percent federal funds rate. The market says we're heading
Speaker 8: to something more like a four percent federal fund rate.
Speaker 8: So there's a pretty big gap about what is a
Speaker 8: neutral monitary policy. FED thanks the neutral manitary policy is
Speaker 8: quite a bit easier than we are today. The market
Speaker 8: thinks that the neutral manitary policy is slightly easier than
Speaker 8: where we are today.
Speaker 2: But what did you do with your own forecast when
Speaker 2: you had Trump come aga? In Volume one? How did
Speaker 2: you change things? Did you anticipate the changes to policy
Speaker 2: beforehand or react once it was introduced.
Speaker 9: I think I thought.
Speaker 8: That there was more risk in the forecast, So I
Speaker 8: think the biggest change for me was to talk about
Speaker 8: risk and uncertainty going up. And I think that's what's
Speaker 8: happened today. I mean, I think the big transition from
Speaker 8: Biden to Trump is under Biden, we sort of knew
Speaker 8: exactly what the policies were, and in fact, over the
Speaker 8: last two years, there hasn't really been much in terms
Speaker 8: of new policy initiatives. Now we're going into the Trump era,
Speaker 8: you know there's going to be a lot changes in
Speaker 8: policy and yet and we don't know yet they're what
Speaker 8: they're going to be. So I think we're going from
Speaker 8: a period of low uncertainty too much higher and certain in.
Speaker 9: That's what's got to get priced into markets.
Speaker 8: That's one reason why I think the bond market has
Speaker 8: done poorly over the last few months.
Speaker 2: Bill appreciate your time. As always built down to there,
Speaker 2: the former New York Fed President, looking out to twenty
Speaker 2: twenty five and beyond. This is the Bloomberg Surveillance podcast,
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