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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
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Speaker 2: Bloomberg Terminal and the Bloomberg Business app at Beginning this hour,
Speaker 2: with stocksin chin KaiA looking to snap a two day
Speaker 2: losing streak, market's whipsword by tariff headlines are leading to
Speaker 2: several downgrades for US sancreities. From Goldman, from City and
Speaker 2: from HSBC. Join Gus now from HSBC, Max Ketner, Max,
Speaker 2: Welcome back to the program, Sir, The facts have changed.
Speaker 2: Talked to me about how the outlook might have changed
Speaker 2: as well.
Speaker 3: Yeah, Look, I think we're still tactically quite cautious on equities.
Speaker 3: We're all, particularly of course in the US. We've just
Speaker 3: put out a note this morning. I think this is
Speaker 3: the kind of time where you need to update your
Speaker 3: framework your indicators pretty much on an hourly basis, because
Speaker 3: like you guys were just discussing, of course, even yesterday,
Speaker 3: things were changing pretty much three times during the day.
Speaker 3: So when we look at our indicators at the moment,
Speaker 3: particularly from a systematic perspective, of course, yes, there has
Speaker 3: been quite a bit of systematic selling. But what we're
Speaker 3: not yet seeing is this sort of final puke. So
Speaker 3: when we look, for example, our momentum and slash CTA indicators,
Speaker 3: they are bearish. They flipped from maximum bullish to bearish,
Speaker 3: but they're only at sort of medium bearish levels until now.
Speaker 3: So we need, I think, for us to be comfortable
Speaker 3: to go back in and to buy the DIP, I
Speaker 3: think we need a bit more sort of a puke
Speaker 3: moment inequities to really say, right, this is the all clear. Now,
Speaker 3: positioning is clear enough, systematics have sold enough, and of
Speaker 3: course from a fundamental perspective, what's changed in the outlook.
Speaker 3: So the stuff that you were alluding to is, you know,
Speaker 3: we were all thinking there is some sort of put
Speaker 3: from the new US administration. With that absent it is
Speaker 3: down to the FED put. But of course with data
Speaker 3: let's say like yesterday, like the jolt data, all services
Speaker 3: of isms or payrolls still pretty pretty okay. You know,
Speaker 3: in a normal environment, that would be really bootish for
Speaker 3: equities and for risk assets overall. For the current environment, however,
Speaker 3: it just puts the FED put even further away. Remember
Speaker 3: what Powell was saying on Friday, We're in no hurry
Speaker 3: at all to do anything in rates. So what we
Speaker 3: would need is the FIT to give some kind of
Speaker 3: not to tightening financial conditions, that they're monitoring market developments
Speaker 3: something like that. But as they said on Friday, I
Speaker 3: think we're still quite a bit of way off.
Speaker 2: There max a lot to unpack there. Let's start with
Speaker 2: the technical term puke. What does the cathartic puke look like?
Speaker 2: We had a ten percent decline at one point in
Speaker 2: yesterday's session, so entered correction territory.
Speaker 4: Briefly, If it's not that, what is it?
Speaker 3: I think what we need to see is broader based.
Speaker 3: Even on Monday, right breadth actually wasn't that bad. It
Speaker 3: wasn't like it was all five hundred stocks going down.
Speaker 3: It was still pretty sort of focused and pretty concentrated
Speaker 3: on some certain sectors, and the high multiple sectors. I
Speaker 3: think what you would want to see is sort of
Speaker 3: the final broad based puke where it's not just you know,
Speaker 3: tech and the high multiple stuff that gets hammered, but
Speaker 3: really the broader market where perhaps even the equal weighted
Speaker 3: SMP underperforms the cap weighted SMP. What you would want
Speaker 3: to see is that spilling over into credit spreads as well,
Speaker 3: right where we haven't really seen a disorderly widening as well,
Speaker 3: and maybe even spilling over into other equity markets where
Speaker 3: then people say, you know what, so far we've been
Speaker 3: hinding out in European equities. We've been you know, thinking
Speaker 3: that this is a completely different story. But now we're
Speaker 3: really playing US for recession fears, and that should spill
Speaker 3: over in to global equity markets once we've got that.
Speaker 3: I think that is then sort of the final puke.
Speaker 3: And another queue to watch perhaps is the momentum factor.
Speaker 3: When we look, of course in US momentum, that momentum
Speaker 3: factor has been absolutely slaughter the last three four weeks.
Speaker 3: Any kind of bottoming there, any kind of a sign
Speaker 3: of a reversal there, I think is another sign where
Speaker 3: we can start buying.
Speaker 5: The dep I think this conversation needs a bit of
Speaker 5: antacid and Max. I am curious about whether we're talking
Speaker 5: about sort of the market equivalent of the economic debate
Speaker 5: here of whether we're pricing in stagflation or pricing in
Speaker 5: something more like a recession, and that is something Julia
Speaker 5: Emmanuel was talking about, what are we pricing in currently?
Speaker 5: What would you take more seriously right now at a
Speaker 5: time where there are a lot of anxieties, but there
Speaker 5: still are people who are hopeful that we could emerge
Speaker 5: from this.
Speaker 3: I think stagflation fears were about a month ago, right
Speaker 3: That was basically when we had January CPI particularly underlying
Speaker 3: inflation much much higher than a lot of people, including
Speaker 3: myself expected, where you know, super core inflation was really
Speaker 3: coming in quite a bit hotter, and that really was
Speaker 3: a month ago.
Speaker 4: When we look at the last three weeks, the amount.
Speaker 3: Of selling that we've seen in cyclicals versus defensives, particularly
Speaker 3: in the US, the amount of decoupling between US cyclical
Speaker 3: def against European cyclical defensives, or really rest of worlds
Speaker 3: cyclical against defensive performance clearly tells us what the market
Speaker 3: is playing now in particularly the last week and a
Speaker 3: half is increasingly recession fears, so we are I think
Speaker 3: we are getting closer to the point where you want
Speaker 3: to start buying that correction. We're not just quite there
Speaker 3: yet because I think, again, it would be different if
Speaker 3: it was just the high multiple stuff, but we're starting
Speaker 3: to see that spill over into other parts of the market.
Speaker 4: It's just not.
Speaker 3: Quite there yet where we can really sound the all
Speaker 3: clear on the systematic positioning unwind being completely over.
Speaker 5: This is a complicated story. It's not just about recession
Speaker 5: and recession fears in the US. It's also about relative
Speaker 5: valuation and the fact that suddenly there is an alternative
Speaker 5: and the idea that Europe looks brighter, especially with the
Speaker 5: likelihood of some sort of fiscal package being passed. How
Speaker 5: much do you lean into that and how much do
Speaker 5: you say what a lot of people have sat on
Speaker 5: this show over the past couple of days, which is
Speaker 5: that's looking pretty expensive, looking pretty bad, that's already over.
Speaker 3: I mean, for one, what is amazing is think if
Speaker 3: two months ago, if at the beginning of January, just
Speaker 3: before inaugration, if we had said I think German small
Speaker 3: in mid camps or European small and midcaps are the
Speaker 3: quote relative save Haven in global equity land. I think
Speaker 3: you guys would have thrown me out of this room
Speaker 3: now and would have sent maybe don't come back again.
Speaker 3: So it is quite funny how things have changed only
Speaker 3: within a couple of weeks. I do agree with you
Speaker 3: it is perhaps the Dacks is not the right place
Speaker 3: maybe anymore. I think it's perhaps in Europe really the
Speaker 3: small in midcamps that should benefit the most from perhaps
Speaker 3: you know that the fiscal package in Germany getting over
Speaker 3: the line. Also perhaps any potential kind of positive news
Speaker 3: around Russia, Ukraine. All of that is really particularly beneficial
Speaker 3: for the smaller in midcaps, but also for other parts
Speaker 3: of the market. We look at China, I think the
Speaker 3: China Internet that ags tech trade, that still has some
Speaker 3: room to left. So it's not like we have to
Speaker 3: throw in the towel on equities entirely, right. It is
Speaker 3: so far mainly a US story. And I think in Europe, yeah,
Speaker 3: find the higher euro, the stronger euro, I think is
Speaker 3: starting to get felt in the larger caps, particularly in
Speaker 3: the German equities, given that they you know, basically get
Speaker 3: generate only or less than twenty percent of their revenues
Speaker 3: outside of or inside of Germany and about eighty percent
Speaker 3: outside of Germany. So the stronger euro will start awagh
Speaker 3: on the performers there, But the smaller and midcaps, I
Speaker 3: think really the ones that you want to look at.
Speaker 3: Also the banks, right, we can look at European banks.
Speaker 3: Still really good European insurance, So there's a lot of
Speaker 3: stuff even within Europe also from a sector perspective under
Speaker 3: the hood that is worth looking at.
Speaker 1: Max an incredible twenty four hours for Europe, potentially one
Speaker 1: step closer to peace on the continent. At the same time,
Speaker 1: you wake up and you see these retaliatory countermeasures to
Speaker 1: US tariffs, what narrative do you think will prevail?
Speaker 3: Look, I think the narrative clearly for the US is
Speaker 3: is that that put from or that we thought was
Speaker 3: there from the US administration, either the strike price is
Speaker 3: much further away, or maybe that put doesn't even exist
Speaker 3: because they want to force in the fit. So I
Speaker 3: think that narrative, particularly for you as risk assets, and
Speaker 3: frankly at some point also for globally for risk assets
Speaker 3: more broadly, will really prevail on the next couple of weeks,
Speaker 3: because ultimately, for a sustained you know, for a sustained
Speaker 3: reversal higher. We will need to see some kind of
Speaker 3: not from the FED to say, Okay, you know what,
Speaker 3: we are monitoring financial conditions, we are monitoring market developments.
Speaker 3: And let's remember that was actually already enough in the
Speaker 3: December twenty eighteen January twenty nineteen episode. You know, they
Speaker 3: were starting to cut rates only in July twenty nineteen,
Speaker 3: but in January already had that bullish reversal because all
Speaker 3: the FED had to do is to say, well, financial
Speaker 3: conditions are quote notably tighter than they were in September.
Speaker 4: That's all they had to do.
Speaker 3: They only had to say notably tighter, and already markets
Speaker 3: were saying that's the FED put that's it.
Speaker 4: So we're not.
Speaker 3: Talking QE, we're not talking emergency rate cuts.
Speaker 4: What I'm talking about.
Speaker 3: Is literally just like a verbal not from the FED
Speaker 3: that we need and that already I think from a
Speaker 3: fundamental perspective, would then change that narrative that we've just
Speaker 3: been talking about.
Speaker 2: A Max appreciate it. Thanks for the update. Max Canada
Speaker 2: there of HSBC. On the equity market, Let's talk about
Speaker 2: some of the stock moves we've seen in the past
Speaker 2: twenty four hours we can in consumer demand, leading to
Speaker 2: a sell off in airline stocks downta, spooking investors after
Speaker 2: kind of its profit forecast in half. Chila Colu of
Speaker 2: Jeffreyes joins US now for more chili. Good morning in rain,
Speaker 2: big changes. What did you see what you were tracking
Speaker 2: in the last month or so, what's happened with these airlines.
Speaker 6: We have a data series that tracks airline traffic on
Speaker 6: apps and folks pre booking, so that data fell off
Speaker 6: about ten percent over the last three months, so trailing
Speaker 6: three months, but the three weeks really fell off. It
Speaker 6: hit the lowest cost carriers the most. So back to
Speaker 6: Ann Marie's point, it's in the heartland and where we're
Speaker 6: seeing the demand fall off. But Delta signaled a fifty
Speaker 6: percent revenue cut. They guided Q one seven to nine percent,
Speaker 6: then they cut it to up three to four. So
Speaker 6: still positive. As Ed Bastian said, we're not in recession territory.
Speaker 6: But January and February, which is the last time we
Speaker 6: heard from them about three weeks ago, was positive growth,
Speaker 6: and so that means the last three weeks really decelerated.
Speaker 6: So Q two is going to be very important because
Speaker 6: it's about forty percent of airline earnings.
Speaker 5: As we strip out some of the motivating reasons for
Speaker 5: why we saw such a deceleration in demand, can you
Speaker 5: track the fall off in airline ticket purchases to some
Speaker 5: of the safety issues that were raised?
Speaker 6: That was cited by both American and Delta yesterday, But
Speaker 6: it was across the board, and that's what I think
Speaker 6: startled so many folks. It was Delta close in bookings,
Speaker 6: so people book airfares closer to when they're actually going
Speaker 6: to travel. It was also corporate demands off, and we've
Speaker 6: seen that in bizjet utilization data as well for February.
Speaker 6: And then third it was a demand across government, which
Speaker 6: United has about four percent of asms and American has
Speaker 6: one point five, So it was.
Speaker 4: Across the board.
Speaker 6: It was Trump's policy's doge really impacting government employees, corporates
Speaker 6: slowing down, and then you know just leisure demand slowing
Speaker 6: as well.
Speaker 5: We heard from Delta that they plan to cut capacity
Speaker 5: to meet slower demand heading into the summer. What does
Speaker 5: that indicate to you about just how temporary this is,
Speaker 5: or if potentially some of the airlines are preparing for
Speaker 5: this fall off to continue for a longer period of
Speaker 5: time and hoping to increase prices to compensate for it.
Speaker 6: I think domestically in the US market, capacity is already
Speaker 6: very tight. That was the story of the first half
Speaker 6: of last year. Capacity grew six to seven percent, and
Speaker 6: then we exited the year about flat and the data
Speaker 6: TSA volumes are flat year over year, but so is capacity.
Speaker 6: So capacity is already fairly tight. So that's a soft
Speaker 6: comment from Delta to make. To cut capacity, we have
Speaker 6: to see demand come in, and I think the next
Speaker 6: four to six weeks is going to be very critical
Speaker 6: to see how the US consumer is going to react.
Speaker 1: Where does the demand come in. I think we were
Speaker 1: all struck around this table yesterday when a headline dump
Speaker 1: that dropped that United said fifty percent drop in government travel.
Speaker 1: Who fills that void?
Speaker 6: It's hard, I mean, it's a small percentage of asms.
Speaker 6: But then Delta also cited corporate demand across the board.
Speaker 6: Airspace and defense was of course the sector cited as
Speaker 6: well as leisures, so it wasn't only one thing, and
Speaker 6: I think that's what is more concerning about the reads.
Speaker 6: But again it's early and so that could change if
Speaker 6: the SMP goes up for the next four weeks, I'm
Speaker 6: sure people will start booking travel again. So it's all
Speaker 6: based on market sentiment.
Speaker 1: What's more challenging domestic travel right now or international?
Speaker 6: Domestic is more challenging. Domestic has always been because you
Speaker 6: have low cost carriers and so they priced down. You
Speaker 6: see tickets from Spirit other low cost carriers for very cheap.
Speaker 6: International is still very positive, and the good news is
Speaker 6: eight three fifties and seven eight sevens are very slow
Speaker 6: on the deliveries, so we're not seeing a lot of
Speaker 6: capacity come into the market. In BacT, that market's very constrained.
Speaker 2: You suggested it's sequity market dependent. I might suggest it's
Speaker 2: dose dependent. If I'm a federal worker this year, I'm
Speaker 2: not traveling. If I've booked a vacation, I'm canceling it.
Speaker 2: If you've got to raise a family at the moment
Speaker 2: and you're dependent on the federal government fearr annual salary,
Speaker 2: I'd be very very nervous abound the rest of the year.
Speaker 2: How is that showing up in the numbers already?
Speaker 6: It's a small percentage of the market, but I think
Speaker 6: DOJE in general, the headlines covering defense stocks is it's
Speaker 6: what's scariest, some of the headlines they put out are
Speaker 6: not actually the reality of what they're cutting. So again
Speaker 6: it's going back to the uncertainty of a big headline,
Speaker 6: and the reality suppose is that what are.
Speaker 4: They actually countsinc When it comes to defense, it's.
Speaker 6: Interesting to me because I thought they would go after larger,
Speaker 6: more bureaucratic issues, but instead they're going after it services contractors,
Speaker 6: which the six public ones we cover comprise about three
Speaker 6: of the largest defense programs, So I thought they would
Speaker 6: eliminate more waste, but they seem to be cutting very
Speaker 6: quickly and very abruptly, so without any precision, which I
Speaker 6: think creates problems as well.
Speaker 5: How much of the story is this? And I ask
Speaker 5: this because yesterday I saw some comments out there like
Speaker 5: if government spending was the main pillar of support for
Speaker 5: the US consumer, then we had a pretty weak consumer
Speaker 5: aside from some of the stimulus that was really in
Speaker 5: to donch the government. Can you talk about what we've
Speaker 5: seen in terms of consumer spending habits leading up to
Speaker 5: this and then in the aftermath, and just how connected
Speaker 5: to the federal spending it is versus the overall tote.
Speaker 5: I know it's hard to parse out, but it kind
Speaker 5: of gives a sense of where we're coming from.
Speaker 6: I think is the government employees. If you're a government
Speaker 6: and employee, you're probably not traveling. But again, that's such
Speaker 6: a small percentage of the market, and some of the
Speaker 6: agencies were cutting from they've already had trouble recruiting and
Speaker 6: we've just gone back to pre pandemic levels six years later.
Speaker 6: So I think it's very problematic just cutting abruptly. And
Speaker 6: I do think the airline cuts go back to consumer
Speaker 6: sentiment on the overall market. As we've all seen our
Speaker 6: stock prices have.
Speaker 4: What's your favorite name?
Speaker 6: This morning, I'm going to go I'm going to actually
Speaker 6: pitch Boeing. I really like Boeing. I think outside the
Speaker 6: Arrapad lines, the Macro, we haven't delivered a single plane
Speaker 6: in six years. The skyline is over sold, and I
Speaker 6: think investors have capitulated on just demand. They think we're
Speaker 6: going to see demand destruction because the market's often for
Speaker 6: the the last three weeks. But I think everybody's still
Speaker 6: waiting for their plan and it's not going to get
Speaker 6: out of line.
Speaker 2: So should I appreciate it? It's good to get off
Speaker 2: to Spade with you. Thank you, Sulda Cary. There of
Speaker 2: Jeffreeson joining us now is David Kelly of JP Morkan
Speaker 2: Asset Management. David, that's some good news going into next week.
Speaker 2: How much comfort will this bring the Federal Reserve?
Speaker 4: Only a little.
Speaker 7: I mean, if you look at the number of stage
Speaker 7: just scanning them, we saw a four percent decline airline affairs,
Speaker 7: which is probably you know, that affects some of the
Speaker 7: things that the airlines are saying to us about some
Speaker 7: weakening and demand. But I really think that the Federal
Speaker 7: Reserve is in a very difficult position here. Until we
Speaker 7: have some clarity on tariffs, they don't know how much
Speaker 7: of an inflation kick we're going to get from tariffs
Speaker 7: this year, and until we've got some clarity on the budget,
Speaker 7: they don't know how much physical stimulus is going to
Speaker 7: be kicked in next year. So I still think they'll
Speaker 7: probably wait and see next week. This economy is beginning
Speaker 7: to look like it needs or will you justifies a
Speaker 7: rate cut, and I do think we'll probably end up
Speaker 7: with more than one rate cut this year. I think
Speaker 7: we may end up with a sequence of rate cuts.
Speaker 7: But I think it's just too early for the Federal
Speaker 7: Reserve to make a decision given the uncertainty about policy.
Speaker 5: What's fascinating to me is a reaction of markets, David,
Speaker 5: the idea that you're seeing a bigger reaction right now
Speaker 5: and equities in your bonds. This idea that maybe the
Speaker 5: Fed put could come back into play and support valuations
Speaker 5: even amid policy uncertainty.
Speaker 4: Do you buy that?
Speaker 5: Is that something that you think is a correct thesis?
Speaker 7: Well, I think that there's some other things on the
Speaker 7: bond market's mind here. I mean one of them is
Speaker 7: that if you look at the numbers that the CBO
Speaker 7: put out yesterday on the budget depthsit so far this year,
Speaker 7: it looks like we're going to crack two trillion dollars
Speaker 7: this year, and we've got a massive budget deficit. And
Speaker 7: the weaker the economy gets, the more likely it is
Speaker 7: that we're going to see even more fiscal stimulus kick
Speaker 7: in next year. So we've got a deteriorating situation, a
Speaker 7: fiscal situation here, and sow economic growth and tariffs will
Speaker 7: only make it worse. So that may be supporting real
Speaker 7: yels here, even if inflation backs off a bit on
Speaker 7: weaken economic growth next year, So I think there's more
Speaker 7: than just inflation and the FED on the bond market's mind.
Speaker 5: Which is also part of the reason why the FED
Speaker 5: might have a hard time just embracing this data and
Speaker 5: then signaling next week that they plan to cut rates
Speaker 5: sooner than maybe they expected. David, what do they need
Speaker 5: to see to have confidence in the forward trajectory given
Speaker 5: that this is backward moving and we have policy that
Speaker 5: is pushing companies to act in real time.
Speaker 7: Yeah, I think the most important thing would be a
Speaker 7: sort of a final story on tariffs for this year
Speaker 7: and for the next few years. We know obviously, as
Speaker 7: an economist, I believe that zero tariffs are the correct policy.
Speaker 7: I think that's a fairly traditional conservative perspective. But some
Speaker 7: clarity on that is vital for them to figure out,
Speaker 7: you know, how is how's the economy going to evolve?
Speaker 7: I mean, what the FED has said very clearly two
Speaker 7: days after the election, j Palell said, we're not going
Speaker 7: to assume, We're not going to guess, and we're not
Speaker 7: going to speculate. But they'd have to assume guests and
Speaker 7: speculate if they move policy right now, and that's what
Speaker 7: they're trying to avoid so that the administration and Congress
Speaker 7: really need to figure out what the policy playing field
Speaker 7: is going to be over the next few years, then
Speaker 7: the Pederal Reserve can try to make some decisions.
Speaker 2: David Kelly if JP Morgan Accent Management, David, thank you.
Speaker 2: The Federal Reserve meeting a week away, David really painted
Speaker 2: a picture of what a tricky position this Federal Reserve
Speaker 2: is going to be in a week from today. It
Speaker 2: could have been trickier without a data point like the
Speaker 2: one we just got.
Speaker 5: At least they don't have runaway inflation of the idea,
Speaker 5: they're coming into a potential inflationary shock. I'll be at
Speaker 5: a one time price adjustment. There is some sense of disinflation.
Speaker 5: That said, the fact that if you do have a
Speaker 5: weakening economy that that could lead to more fiscal stimulus
Speaker 5: makes it very complicated for bond investors, let alone just
Speaker 5: the FED.
Speaker 2: If you are just joining us, welcome to the program.
Speaker 2: Moments ago, a small downside surprise on CPI headline month
Speaker 2: over month zero point two percent the estimate zero point three.
Speaker 2: Stripping out food and energy zero point two percent, the
Speaker 2: estimate zero point three. To discuss this and a whole
Speaker 2: lot more joining us. Nas Mohammad, Aaron of Queen's College, Cambridge. Mhammed,
Speaker 2: Welcome back to the program sir, good to catch up
Speaker 2: with you. Important data point. How does this change things
Speaker 2: if at all?
Speaker 8: So if you talk to economists, I'll tell you looking
Speaker 8: back it's good news. Looking forward, there's very little information
Speaker 8: content because of what David just said. What you've been
Speaker 8: discussing all day is we don't know what to pass
Speaker 8: through of expected and actual tariffs will be. So that's
Speaker 8: where the economists are. For those in the market having
Speaker 8: been disappointed on the Trump put, this is better news
Speaker 8: on the Fed put, and I think that's why you're
Speaker 8: getting such a strong reaction on the equity side.
Speaker 2: There's been so much confusion Mhammad about tariffs in the
Speaker 2: past twenty four hours or so. US several hats, one
Speaker 2: of which is you've been a business leader for many,
Speaker 2: many years, and I think you made the important distinction
Speaker 2: when we had the boom of inflation. You made the
Speaker 2: point that this was not going to be transitory because
Speaker 2: of what you saw at the corporate level, how companies
Speaker 2: were acting and how they were responding given the threat
Speaker 2: of higher tower is still to come. What do you
Speaker 2: see now from companies and what does it indicate to
Speaker 2: you about what data might look like in months and
Speaker 2: quarters to come.
Speaker 8: So two things are obvious to me, John. One is
Speaker 8: that companies have gone into a wake and see attitude
Speaker 8: and understandly so, especially if you're multinational, you need clarity.
Speaker 8: So you're postponing decisions because you don't want to make
Speaker 8: a decision that ends up being a big mistake because
Speaker 8: the world has changed on you. So we are seeing
Speaker 8: business activities slow down. The second thing we're seeing is
Speaker 8: people are much more ready to pull the trigger on
Speaker 8: price increases than they were in twenty twenty one twenty
Speaker 8: twenty two. So if these tariffs stick, and if if
Speaker 8: we get more did for tat trade issues and things
Speaker 8: like that, then they pass through to prices will be
Speaker 8: quick and it will come at a time when demand
Speaker 8: is softening. So then you bring the third issue, which
Speaker 8: is a consumer. The consumer is hesitant already. I take
Speaker 8: seriously what you've been saying, all of you saying about
Speaker 8: what's happening to airline, what you're hearing from different retailers.
Speaker 8: There's been risk aversion clarity on the sense of the household.
Speaker 8: So put all that together, John, it is a weight
Speaker 8: and see economy that cannot absorb much of a price hit.
Speaker 1: Is it an economy that can potentially enter recessions?
Speaker 8: Here, Muhammad, my probability is twenty five to thirty percent.
Speaker 8: It was ten percent at the beginning of the year,
Speaker 8: so there's been quite quite a big change. Why isn't
Speaker 8: it higher Because it's a lot good happening in the
Speaker 8: US economy as well. But if we get a prolongation
Speaker 8: of policy uncertainty, then that probability will go up.
Speaker 5: There's a question about the response from central banks globally, Mohammed.
Speaker 5: If you do have this environment where inflationary pressures are
Speaker 5: going to be stickier at the same time that you
Speaker 5: have slow in growth. Christine Laguard called it an era
Speaker 5: of shock and saying that maintaining stability in a new
Speaker 5: era will be a formidable task. If the central banks
Speaker 5: around the world had to choose what's worse allowing inflation
Speaker 5: to be a little bit hotter but trying to help
Speaker 5: growth or suppressing inflation at the risk of not rescuing
Speaker 5: growth and allowing it to continue to plummet.
Speaker 8: So for both Europe and the US, it is the former,
Speaker 8: these economies can get to stall speed pretty quickly. We
Speaker 8: don't want that because the damage that that creates is significant.
Speaker 8: So tolerating slightly higher inflation would be the better choice
Speaker 8: the way you framed it. But Lisa, remember these are
Speaker 8: central banks that made a huge mistake, and they may
Speaker 8: be much more sensitive to inflation than than we would
Speaker 8: be given the mistakes they made.
Speaker 5: The idea of transitory and not maybe responding to it
Speaker 5: in a way that maybe they should have. I'm just
Speaker 5: wondering if let's say they did take what you just
Speaker 5: said seriously and they did say, look, we're going to
Speaker 5: have to just tolerate higher inflation for longer and we
Speaker 5: really need to address slower growth, how many times would
Speaker 5: you expect them to have to cut this year in
Speaker 5: order to offset some of the uncertainty and frankly, the
Speaker 5: consumer demand destruction that we're seeing in real time.
Speaker 8: So to be clear, if two percent was really the
Speaker 8: operative inflation target, we wouldn't be speculating on how many
Speaker 8: cuts would be speculating on the timing of the hike
Speaker 8: because the data has sold for quite a long time,
Speaker 8: but because most people believe that two percent is a
Speaker 8: medium term to long term target, there is speculation and
Speaker 8: how many cuts. I'm in the one camp. I think,
Speaker 8: given what we know today, we get one now if
Speaker 8: the tarrier tensions persist and did for TAT get worse.
Speaker 8: I mean, at some point yesterday with Canada, we were
Speaker 8: near tipping points and that would have forced a FED
Speaker 8: to revisit what is thinking right now about weight cuts.
Speaker 8: So it really depends where this trade war goes.
Speaker 2: Lisa Muhammed, I want to revisit one of your best calls.
Speaker 2: You are probably one of the best risk managers that
Speaker 2: I know, that's for sure. I want to talk about
Speaker 2: February nineteenth, February nineteenth all time highs, and not the
Speaker 2: February nineteenth all time high of twenty twenty five. The
Speaker 2: February nineteenth all time high of twenty twenty and I
Speaker 2: remember you came out around that time and you said,
Speaker 2: don't buy this now. The equity market is corrected in
Speaker 2: twenty twenty five ten percent from the all time highs
Speaker 2: of February nineteen, but it's quite a parallel to think
Speaker 2: about those two dates. Muhammed, what would your approach be
Speaker 2: to markets now and equity specifically, So.
Speaker 8: I'm asked this all the time. John, I was asked
Speaker 8: this morning by someone here in the college, is it
Speaker 8: time to buy? It's very tempting to buy because with
Speaker 8: ten percent off on the SMP, with thirteen to fourteen
Speaker 8: percent off on the Nasdaq. I respond very simply, what
Speaker 8: mistake can you not afford to make? You know, most
Speaker 8: mistakes in the investment world are forgivable over time, and
Speaker 8: that's a great thing about the investment world. If you
Speaker 8: bet on something that the faults, that's a different issue.
Speaker 8: So investors need to understand how much tolerance DoD they
Speaker 8: have for short term mistakes and how much tolerance should
Speaker 8: they have for volatility, because the probability of both these
Speaker 8: things has gotten a lot higher than it was at
Speaker 8: the beginnion of the year.
Speaker 4: Muhammed, I appreciate your time. You one of the best.
Speaker 2: Thanks for catching up with it's a good friend of
Speaker 2: this program, a good friend of ours. Mohammed al Aaron
Speaker 2: of Queens College, Cambridge. This is the Bloomberg Survenmans podcast,
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