WEBVTT - Yardeni Research President Ed Yardeni Talks Bond Market 0:00:02.520 --> 0:00:07.400 Bloomberg Audio Studios, Podcasts, radio News. 0:00:07.920 --> 0:00:11.440 A treat on this special edition of Bloomberg Surveillance. Ed 0:00:11.520 --> 0:00:15.040 Yard Denny for an extended conversation, Ed. I read your 0:00:15.080 --> 0:00:18.400 note carefully yesterday, folks. I can't say enough about the 0:00:18.480 --> 0:00:22.720 value of subscribing to Yard Denny's Quick Takes. You assessed 0:00:22.840 --> 0:00:27.400 the bond market. Should people that own shares be afraid 0:00:27.560 --> 0:00:28.680 of higher yields? 0:00:30.120 --> 0:00:32.639 I think they should be concerned, But all in all, 0:00:32.720 --> 0:00:36.400 I think bond yields of normalized. I think that's important 0:00:36.440 --> 0:00:39.960 to keep that in mind. They were abnormally low between 0:00:39.960 --> 0:00:43.800 the Great Financial Crisis and the Great Virus Crisis because 0:00:43.840 --> 0:00:47.160 the Fed was manipulating rates. It was rigging the bond 0:00:47.240 --> 0:00:50.440 market with the short term rate, the Federal funds rate 0:00:50.840 --> 0:00:54.480 being down to zero, and then of course quantitative easing. 0:00:55.040 --> 0:00:57.240 And now the bond market has been sort of liberated, 0:00:57.760 --> 0:01:00.840 free to tell us what the line demand and the 0:01:00.880 --> 0:01:03.560 credit markets really is. And I think we're back to 0:01:03.560 --> 0:01:06.400 where we were before the Great Financial Crisis, when bondyls 0:01:06.520 --> 0:01:09.520 range between four and five percent. So I don't think 0:01:09.520 --> 0:01:11.440 we should freak out about that. I think we should 0:01:11.440 --> 0:01:14.160 actually welcome it because it's a sign that the economy 0:01:14.240 --> 0:01:16.240 is doing just quite well. 0:01:16.400 --> 0:01:19.240 You think parts for people on the planet the degree 0:01:19.319 --> 0:01:20.120 with doctor. 0:01:21.240 --> 0:01:23.600 So Ed, I mean, given that backdrop, I mean, how 0:01:23.600 --> 0:01:26.480 do you think this Federal Reserve is going to proceed 0:01:26.520 --> 0:01:27.800 for the remayner of twenty twenty five. 0:01:29.400 --> 0:01:33.320 Well, it's interesting, you know, the faedis they just won't 0:01:33.319 --> 0:01:37.200 listen to me. I don't won't I understand why I 0:01:37.240 --> 0:01:42.360 have been Back in August of last year, we were saying, 0:01:42.920 --> 0:01:46.160 my collie Eric Waterstein and I were saying that the 0:01:46.240 --> 0:01:50.560 economy is resilient, it's strong, it's demonstrated that it could 0:01:50.800 --> 0:01:54.800 withstand a tightening of monetary policy. And again, I think 0:01:54.800 --> 0:01:58.400 the FED not only tightened the monetary policy when they 0:01:58.400 --> 0:02:01.080 took the Fed funds right zero of five and a 0:02:01.160 --> 0:02:05.520 half percent between twenty twenty two and twenty twenty three, 0:02:05.600 --> 0:02:09.440 I think they also normalized interest rates, both the Federal 0:02:09.440 --> 0:02:11.320 funds rate and the bond deal. 0:02:11.320 --> 0:02:13.560 They're kind of back to normal. 0:02:14.360 --> 0:02:16.799 But so in August we thought there was no need 0:02:16.840 --> 0:02:19.880 for the Fed to act, but they didn't listen. So 0:02:19.919 --> 0:02:23.120 they did not just twenty five basis points. They did 0:02:23.120 --> 0:02:28.120 fifty basis points in September eighteenth, and we argued that 0:02:28.120 --> 0:02:31.160 that would probably lead to higher bond yields. And that's 0:02:31.200 --> 0:02:33.400 exactly what's happened. We've had the FED funds rate down 0:02:33.400 --> 0:02:34.480 one hundred basis points. 0:02:34.800 --> 0:02:35.639 This is brilliant. 0:02:36.440 --> 0:02:39.560 Paul, I can't say enough about this overnight on LinkedIn, 0:02:39.639 --> 0:02:42.520 Paul Dunovan of UBS and he'll be with us folks 0:02:42.760 --> 0:02:46.120 in the coming days. Like doctor Yar Dunny was collegially 0:02:46.320 --> 0:02:50.680 scathing by to FED and the recent decisions exactly so. 0:02:50.800 --> 0:02:53.440 And I mean, Harry, let me just. 0:02:53.440 --> 0:02:56.440 Answer your question. The bottom line is I think they're 0:02:56.480 --> 0:02:59.720 definitely on pause. That's the message we're getting from the Fed. 0:03:00.080 --> 0:03:02.480 I think it may be done and done, or maybe 0:03:02.520 --> 0:03:04.120 one or two and done. 0:03:04.120 --> 0:03:08.680 But I think the PAD doesn't have to lower interest rates. 0:03:08.480 --> 0:03:12.200 Anymore as we just complete two years twenty twenty three, 0:03:12.280 --> 0:03:14.959 twenty twenty four of north of twenty percent returns in 0:03:15.120 --> 0:03:17.880 s and P five hundred index. And how do you 0:03:17.880 --> 0:03:20.680 think about twenty twenty five stocks, bonds, all that kind 0:03:20.680 --> 0:03:23.359 of stuff. How are you talking to your clients this year? 0:03:24.320 --> 0:03:31.679 Well, I go terms roaring twenty twenties, baby, yeah, I mean, 0:03:32.560 --> 0:03:36.440 so far, so good. Back in twenty nineteen, we suggested 0:03:36.480 --> 0:03:39.160 that the decade ahead. The twenty twenties could be the 0:03:39.280 --> 0:03:42.520 Roaring twenty twenties. That we noticed that there's a shortage 0:03:42.520 --> 0:03:47.040 of labor skill, labor especially, and that there was a 0:03:47.080 --> 0:03:54.080 tremendous plethora of technological innovations that were actually useful, that 0:03:54.240 --> 0:03:59.440 actually work, and are relatively inexpensive to implement, and that 0:03:59.520 --> 0:04:03.000 these technologies would lead to a productivity growth boom we've 0:04:03.000 --> 0:04:06.400 had before. This one seems to be much more sustainable 0:04:06.440 --> 0:04:08.839 and potentially much more significant. 0:04:09.160 --> 0:04:11.200 Ed Yard Denny with us folks a special edition of 0:04:11.240 --> 0:04:13.840 Bloomberg Savannahs We're with you till nine o'clock, where am 0:04:13.920 --> 0:04:17.960 Mariy Horden and David Gura will join from Washington with 0:04:18.080 --> 0:04:23.520 the services at the National Cathedral for James Earl Carter. Thrilled, 0:04:23.520 --> 0:04:25.680 tot ann Mary Horden and David Gurrow will give us 0:04:25.720 --> 0:04:29.120 their perspective on that. We are thrilled as well to 0:04:29.120 --> 0:04:31.400 give you ed Yard Denny this morning. I can't say 0:04:31.480 --> 0:04:35.720 enough about in October. I think it was two years ago, 0:04:36.279 --> 0:04:38.080 ed Yard Denny, and ed I'm going to give credit 0:04:38.120 --> 0:04:41.440 to the great technician Ralph N. Kemport as well, said 0:04:41.440 --> 0:04:47.680 climb on board equities. You maintain your enthusiasm, Doctor Yard Denny. 0:04:48.320 --> 0:04:50.880 I looked at the lineup of hedge fund performance, and 0:04:50.920 --> 0:04:56.039 everybody hedged last year. Very few people were full Yard 0:04:56.040 --> 0:04:59.520 Denny describe full Yard Denny. 0:05:00.839 --> 0:05:05.200 Well fully ARDNNI right now is to stay invested. It's 0:05:05.200 --> 0:05:07.359 hard for me to tell people who've been in cash 0:05:07.440 --> 0:05:10.640 to jump in here because the market isn't cheap. But 0:05:11.560 --> 0:05:17.440 if you've been fully invested, particularly in technology, communication services, industrials, financials, 0:05:17.440 --> 0:05:20.240 which is the sectors we favored, we would actually stay 0:05:20.279 --> 0:05:23.120 with them. I know they're not cheap, but on the 0:05:23.200 --> 0:05:27.839 other hand, their earnings outlook is really quite quite good 0:05:27.880 --> 0:05:28.360 for the year. 0:05:28.560 --> 0:05:29.920 For the current year, we. 0:05:29.800 --> 0:05:32.120 Have two hundred and eighty five dollars a share for 0:05:32.240 --> 0:05:34.919 the S and P five hundred. That beats all the 0:05:34.960 --> 0:05:38.200 other strategists on the street. And that's consistent with the 0:05:38.279 --> 0:05:43.320 roaring twenty twenties idea of a productivity led economic boom. 0:05:43.560 --> 0:05:45.560 And it seems like for twenty twenty five, you know, 0:05:45.600 --> 0:05:47.839 given where the FED is ie probably a little bit, 0:05:49.080 --> 0:05:50.880 you know, maybe a couple of cuts at most, for 0:05:50.920 --> 0:05:53.120 twenty twenty five, it sounds like it's a year where 0:05:53.160 --> 0:05:56.840 earnings really have to push this market. Higher earnings have 0:05:56.880 --> 0:05:59.080 to come through it. Do you have concerns about some 0:05:59.120 --> 0:06:00.839 of the earnings sessments out there for this market? 0:06:01.800 --> 0:06:04.640 Well, look, not only does the Fed not listen to me, 0:06:04.760 --> 0:06:08.520 but the market doesn't listen to me. I would love 0:06:08.560 --> 0:06:14.160 to have a nice, civilized, gradual bull market from here 0:06:14.200 --> 0:06:18.680 that's driven just by earnings and not valuations. Valuations are 0:06:18.720 --> 0:06:21.000 not cheap. The buffet ratio is at an all time 0:06:21.080 --> 0:06:27.159 record high. The forward pe is around twenty two. Back 0:06:27.600 --> 0:06:30.520 right before the tech wreck of two thousand, it was 0:06:31.000 --> 0:06:33.240 twenty five, so we're not far from that. I mean, 0:06:33.440 --> 0:06:38.040 information technology and communication services account for a hop forty 0:06:38.080 --> 0:06:41.080 percent of the S and P five hundred, and we 0:06:41.160 --> 0:06:42.960 know the thirty percent of the S and P five 0:06:43.040 --> 0:06:45.880 hundred is the magnificent seven. Look, I don't think these 0:06:45.920 --> 0:06:48.440 stocks are going to magnificent seven are going to go away. 0:06:48.480 --> 0:06:50.600 I think they're here to stay. I think they're going 0:06:50.600 --> 0:06:53.120 to continue to account for high valuation multiple. I think 0:06:53.120 --> 0:06:56.279 they're going to continue to perform. But I'm also accounting 0:06:56.320 --> 0:06:59.440 on the SMP four hundred and ninety three to do well. 0:06:59.520 --> 0:07:02.080 So a year on target is seven thousand on the 0:07:02.160 --> 0:07:05.800 S and P five hundred which I think can be 0:07:05.920 --> 0:07:08.520 driven mostly up by earnings. 0:07:08.920 --> 0:07:14.040 Tell us about the linkashire of nominal GDP into revenue 0:07:14.080 --> 0:07:17.320 which supports your earnings, call the margin called the development 0:07:17.360 --> 0:07:19.880 of free cash flow. Do we have a buoyancy of 0:07:19.960 --> 0:07:23.160 five percent nominal GDP sustained? 0:07:24.480 --> 0:07:24.920 I think so. 0:07:25.160 --> 0:07:30.760 I think again, consistent with a roaring twenty twenties scenario. 0:07:31.760 --> 0:07:36.000 I think the productivity, which is currently quadrupled from zero 0:07:36.080 --> 0:07:38.720 point five percent at an annual rate on a five 0:07:38.800 --> 0:07:42.400 year trailing basis. It was zero point five percent back 0:07:42.440 --> 0:07:45.360 at the end of twenty fifteen, and now we're at 0:07:45.400 --> 0:07:49.480 two percent, so we've already seen a significant productivity growth boom. 0:07:49.520 --> 0:07:53.320 But two percent is kind of average for the historical average. 0:07:53.360 --> 0:07:56.480 So what we're counting on is productivity to do a 0:07:56.560 --> 0:07:58.720 bit better than that, maybe three, three and a half 0:07:58.800 --> 0:08:02.280 even four percent, which to some people might sound delusional, 0:08:02.400 --> 0:08:06.600 but if you look at previous productivity growth booms, that's 0:08:06.680 --> 0:08:08.960 what we get to, and we think we're going to 0:08:09.000 --> 0:08:11.560 get to that handily by the end of the decade 0:08:11.640 --> 0:08:16.360 because of the technologies that are available out there. So yeah, 0:08:16.440 --> 0:08:20.560 I think three percent growth is kind of what we're 0:08:20.600 --> 0:08:22.840 at right now. Maybe a little less than that on 0:08:22.880 --> 0:08:25.000 a year over your basis, three and a half to 0:08:25.040 --> 0:08:29.560 four percent real GDP is possible. Add two percent wow inflation, 0:08:29.760 --> 0:08:31.080 and you get five to six percent. 0:08:31.320 --> 0:08:36.080 I can't emphasize enough. Paul how a lone yard Denny 0:08:36.240 --> 0:08:39.760 is on this. There's some bulls out there, John stofis. 0:08:39.400 --> 0:08:43.280 I'm alone. I'm alone, but I don't feel lonely. Don't 0:08:43.280 --> 0:08:43.880 feel lonely. 0:08:43.920 --> 0:08:47.000 But the idea that we're going to sustain three percent 0:08:47.080 --> 0:08:50.080 real GDP, how many guests are telling it's. 0:08:49.960 --> 0:08:53.240 Pretty loan call exactly? Hey, Ed, what are you suggesting 0:08:53.240 --> 0:08:55.000 folks doing a fixed and can market Because a lot 0:08:55.000 --> 0:08:57.400 of folks feel pretty comfortable with four point two five 0:08:57.400 --> 0:09:00.520 percent into your treasury. Do they need to take credit risk? 0:09:02.400 --> 0:09:04.560 They don't really need to take credit risk, and I 0:09:04.640 --> 0:09:06.760 welcome that. I think that's again normalization. 0:09:06.960 --> 0:09:10.520 We should have an economy where if investors don't want 0:09:10.520 --> 0:09:14.360 to take risk, they shouldn't be punished with zero to 0:09:14.440 --> 0:09:18.760 two percent yields on their money market funds. I think 0:09:18.760 --> 0:09:22.319 they should be getting a reasonable return, and four four 0:09:22.360 --> 0:09:25.080 and a half percent is certainly a reasonable. 0:09:24.720 --> 0:09:27.880 Return on a two year On the other. 0:09:27.720 --> 0:09:31.199 Hand, people who want to lock it in can certainly 0:09:31.240 --> 0:09:34.840 go for the four and a half and higher percents 0:09:34.840 --> 0:09:38.520 that are available in the capital markets, so you don't 0:09:38.559 --> 0:09:42.240 have to take risk, but there's greater reward obviously if 0:09:42.240 --> 0:09:45.920 you're willing to go extend into the bond market, going 0:09:45.960 --> 0:09:48.800 to the corporates, maybe even into the high yields. 0:09:49.520 --> 0:09:52.360 Edgar Denny, thank you so much, greatly, greatly appreciate it. 0:09:52.400 --> 0:09:54.920 This morning, Edward Jardnney there with a call of seven 0:09:54.960 --> 0:09:58.280 thousand XPX, I didn't in my head. I'm sorry. I 0:09:58.320 --> 0:10:01.360 can't like interpolate the extra late on the Dow Jones 0:10:02.000 --> 0:10:03.000 ridest average. 0:10:03.040 --> 0:10:03.960 But it's a big number.