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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. People recognize there's an overvaluation,

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Speaker 1: but at the same time, there's no catalyst for dealing

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Speaker 1: with that.

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Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,

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Speaker 2: and this is Trump Economics, the podcast that looks at

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Speaker 2: the economic world of Donald Trump, how he's already shaped

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Speaker 2: the global economy. What on earth is going to happen next?

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Speaker 2: This week, we're doing something we don't normally do. We're

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Speaker 2: talking about the stock market, the US stock market, because

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Speaker 2: apparently a lot of people don't understand it. Let me explain,

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Speaker 2: Like many of you, I had some holiday over the summer,

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Speaker 2: and holiday inevitably means maybe having more conversations with normal

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Speaker 2: human beings who don't spend their time checking the news

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Speaker 2: or thinking about the state of the economy. The question

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Speaker 2: I had more than any other from those normal human

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Speaker 2: beings as we sat on the beach or wherever it was, was,

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Speaker 2: if there's so much scary stuff happening in the US

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Speaker 2: today and so much uncertainty hanging over pretty much every

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Speaker 2: part of the economy, why on earth is the stock

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Speaker 2: market so high? And it is a good question. The

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Speaker 2: main US index s and P five hundred hit another

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Speaker 2: all time high at the end of August. It's up

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Speaker 2: around thirty percent since early April, when investors were very

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Speaker 2: worried about all those tariffs, many of which are still

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Speaker 2: in place. And that all time high in the market

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Speaker 2: came just days after Donald Trump had put potentially the

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Speaker 2: entire independence of the US central banking question by firing

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Speaker 2: the Federal Reserve Governor Lisa Cook. So you might say

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Speaker 2: it's the bomb market that needs to worry about all

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Speaker 2: that about inflation and the Fed, not stocks, but the

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Speaker 2: ten year bond yield, long term cost of borrowing for

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Speaker 2: the US well, that actually fell after Lisa Cook was fired.

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Speaker 2: So what gives I mean, we know the stock market

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Speaker 2: isn't the US economy, but it is supposed to reflect

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Speaker 2: reasonable expectations of US company's ability to make money in

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Speaker 2: the future, and that depends on quite a lot of

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Speaker 2: things that you might say President Trump had put into

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Speaker 2: question the ability to trade, export and import freely, stable economy,

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Speaker 2: predictable policy making. And there are quite a lot of

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Speaker 2: people in the market worrying about these things. And they're

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Speaker 2: also worried that the market has become way too dependent

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Speaker 2: on a handful of companies, especially the ones associated with AI,

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Speaker 2: but none of that has translated into a serious reversal

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Speaker 2: in the market until now. Could this be the month

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Speaker 2: that that changes. Well, we had a piece out earlier

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Speaker 2: this week that did argue that the US stock market's

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Speaker 2: fate comes down to the next fourteen trading sessions. So

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Speaker 2: I thought we'd better have a quick word about what

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Speaker 2: could happen in the next two weeks and what is

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Speaker 2: underlying this basic confidence that we've seen in among investors

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Speaker 2: in the last few months. And we don't offer investment

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Speaker 2: advice on this show, thank goodness, but I did want

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Speaker 2: to have an informed debate about it with two regulars

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Speaker 2: who are in the DC studio talking to me now,

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Speaker 2: Anna Wong, chief US economists for Bloomberg, and Ed Harrison,

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Speaker 2: senior strategist for Bloomberg and author of the Everything Risk newsletter. Ed, Anna,

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Speaker 2: fantastic to have you.

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Speaker 3: Good to be here, Stephanie, good to be here.

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Speaker 2: Thank you for sort of scrambling to do this show.

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Speaker 2: Of course, as is always the way, we wanted to

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Speaker 2: do something about the strength of the stock market and

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Speaker 2: whether it might change. And as we're saying this on

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Speaker 2: Tuesday the markets heading south. So we were either very

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Speaker 2: precient or have once again sort of been counterindicators. But

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Speaker 2: I mean ed that you may have had the same

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Speaker 2: experience I had over the summer that ordinary sort of

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Speaker 2: bystanders of the US economy just find it pretty curious

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Speaker 2: that the stock market's been so strong.

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Speaker 1: Yes, definitely. I would say that a lot of people

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Speaker 1: I've spoken to are thinking there's a relative amount of

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Speaker 1: chaos in terms of the economic order, and they're wondering,

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Speaker 1: how is it possible that the market is up so much.

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Speaker 1: I would start out the conversation by noting that the

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Speaker 1: last Bank of America fund manager report had ninety one

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Speaker 1: percent of fund manager saying that US equities were overvalued.

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Speaker 1: So that's a lot that's pretty much everyone. And so

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Speaker 1: what it says to you, were they say they should

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Speaker 1: sell the exactly? I think that's the problem. The problem

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Speaker 1: is is that Number One, when you look at the

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Speaker 1: economic surprises in the last month or so, last two months,

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Speaker 1: they've been to the upside. Number Two, the last earning season,

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Speaker 1: particularly from those stocks that you were talking about, where

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Speaker 1: the concentration was very good. All of those companies, even

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Speaker 1: when there were some problems like data centers at Nvidia,

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Speaker 1: also with Amazon and their AWS unit, they still overall

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Speaker 1: had numbers that were stellar, better than the overall market

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Speaker 1: in fact, and better than expectations, and so that's what's

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Speaker 1: driving the market higher. It's very difficult to sell when

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Speaker 1: the stocks that you would sell are actually beating expectations

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Speaker 1: and the economy overall is doing better than expected. And

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Speaker 1: so you have this dichotomy playing out where people recognize

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Speaker 1: there's an overvaluation, but at the same time there's no

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Speaker 1: catalyst for dealing with that.

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Speaker 2: And actually, on the subject of catalysts, the piece I

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Speaker 2: referenced about the next fourteen trading sessions, I mean we're

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Speaker 2: straight after Labor Day now in the US early September,

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Speaker 2: there's always a kind of back to school feeling also

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Speaker 2: for the market, and as that piece pointed out, September

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Speaker 2: is often a pretty choppy month for the market. In

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Speaker 2: these kind of key bits of news we're going to

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Speaker 2: get over the next couple of weeks, do you think

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Speaker 2: they could be critical for the momentum of the market.

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Speaker 1: Yeah, this is probably where and is going to come

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Speaker 1: in at some point, because ultimately a lot of this

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Speaker 1: has to do with the FED on some level. Two

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Speaker 1: things that the market thinks in terms of this Fed's

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Speaker 1: got the market's back, and overall, there's really no reason

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Speaker 1: when the economy's going higher and the Fed's got our

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Speaker 1: back to sell. What we found in particular with large

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Speaker 1: investors is that they relate to the game when Donald

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Speaker 1: Trump reversed his tariffs early on, small investors bought the

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Speaker 1: dip and then people had to chase those returns and

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Speaker 1: that's driven the market higher. And now we're getting to

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Speaker 1: a point where the FED could potentially cut, and so

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Speaker 1: the question is are they going to cut? When we

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Speaker 1: talk about the next fourteen trading days, that's the terminal

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Speaker 1: date in those days the Fed finally being able to cut,

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Speaker 1: Will they cut, how much will they cut? Will there

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Speaker 1: be the centers and so forth. I think that that's

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Speaker 1: the critical test over the next three weeks.

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Speaker 2: Will go through some of the individual data, but just

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Speaker 2: sort of broadly, when Ed talks about, you know, he's

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Speaker 2: coming from the market perspective. This is what people in

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Speaker 2: the markets want to see in this sense of the

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Speaker 2: FED having our back quote unquotes, do you think they're

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Speaker 2: going to get what they need? Do you think this

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Speaker 2: is going to be a reassuring couple of weeks for

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Speaker 2: US dot market or something a bit more volatile.

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Speaker 3: So we have two more key data point.

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Speaker 4: One is the jobs report this Friday, and also a

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Speaker 4: CPI report. The market thinks that the jobs report is

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Speaker 4: all that matters, and CPI has this really high for

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Speaker 4: it to shop September rate cut. So now this jobs report, well,

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Speaker 4: there's barely any consensus. The range of forecasts out there

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Speaker 4: goes from zero to one hundred thirty thousand, and I

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Speaker 4: think even for unemployment right there's people thinking it's could

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Speaker 4: be four point two, four point one, four part three.

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Speaker 4: So I think that if the unemployment rate were to

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Speaker 4: edge down surprisingly, I think that could well cost a

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Speaker 4: market to price away a September rate cut back to

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Speaker 4: right now, the probability of a rate cut in September

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Speaker 4: is eighty nine percent according to a futures market. I mean,

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Speaker 4: if the jobs report was surprisingly strong, we could see

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Speaker 4: probability go go back down to sixty or fifty five

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Speaker 4: or something vague, and then it will become a coin toss.

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Speaker 4: And that's I think that's the type of stuff the

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Speaker 4: stock market doesn't like, which is uncertainty.

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Speaker 3: I don't know if ED will agree we'll.

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Speaker 2: Go back to that, because it seems like there's been

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Speaker 2: a lot of uncertain over the last few months that

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Speaker 2: they've managed to struggle, but they are obviously very focused

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Speaker 2: on these numbers. Just to touch on the inflation aspect,

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Speaker 2: because one of the factors that had led traders to

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Speaker 2: have a higher expectation of a rate cut from the

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Speaker 2: Fed this month, along with the weaker labor market figures

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Speaker 2: that we had, was also in the inflation numbers. So

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Speaker 2: is there anything there that could change the way the

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Speaker 2: Fed and then potentially the market is thinking.

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Speaker 4: What I've heard from the markets is that CPI has

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Speaker 4: to be really high, say zero point four point five,

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Speaker 4: to be a game changer for a rate cut, and

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Speaker 4: I think it would be.

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Speaker 2: Just remind us what it is now.

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Speaker 3: So in the.

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Speaker 4: Past four months it has been fluctuating between point one

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Speaker 4: two point three, and only in the last month had

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Speaker 4: CPI it comes to point three, But previously.

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Speaker 2: That's the increase in just the month, Yeah, just the month,

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Speaker 2: So point four the annual rate is the annual rate

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Speaker 2: is in the high two. I think I believe two

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Speaker 2: point nine or close to three point zero, but a

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Speaker 2: point four point five annual increase would be if you

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Speaker 2: analyze that would be corresponding to four to five percent inflation.

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Speaker 2: This is why point four five are super ugly readings.

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Speaker 2: But you're not expecting that because you've looked at how

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Speaker 2: the impact of tariffs, for example, on prices, and we've

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Speaker 2: not been seeing those kind of numbers at least not yet.

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Speaker 4: Is that right, well, Stephanie, our view on this is

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Speaker 4: very dynamic in the sense that passed through on tariff

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Speaker 4: is not static.

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Speaker 3: Firms will only pass through if they can.

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Speaker 4: And so this second quarter earning seasons, which I think

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Speaker 4: market participants took us overall quite encouraging, was that there's

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Speaker 4: not much evidence that firms profits are hit by these

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Speaker 4: tariff which was the piece of puzzle for me because

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Speaker 4: our view had been that, well, maybe tariffs won't translate

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Speaker 4: into inflation so fast because firms will be eating it

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Speaker 4: through profit compression. But so far we have not seen

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Speaker 4: much tariff passed through in CPI, we have not seen

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Speaker 4: much profit compression and firms. But we do know that

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Speaker 4: US firms are taking the front of the tariff. So

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Speaker 4: who in US is really taking the brunt of the tariff.

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Speaker 4: It's like the doc that did Doc bark In like

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Speaker 4: Sherlock's home tail.

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Speaker 2: Okay, so is it possible that Donald Trump is right

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Speaker 2: and it's those foreigners that are paying that.

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Speaker 4: I don't think no. I think the evidence is still

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Speaker 4: pretty firm on that, although I have been hearing some

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Speaker 4: very esoteric explanations, which is that foreigners are not cutting

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Speaker 4: the price they sold to the US importer. However, they're

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Speaker 4: offering credits on exports services, which is why import indices

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Speaker 4: will never capture any discounts. This is just a very

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Speaker 4: offbeat explanation which I've heard from a few people now.

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Speaker 4: So I think we need to examine that. Usually in

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Speaker 4: the importer US also exports, so if they get some

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Speaker 4: credit on the expert side, maybe that helps cushion something.

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Speaker 4: I don't know, because at the end of the day,

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Speaker 4: from a firm's perspective, it's about managing this cost increase

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Speaker 4: imports tariff rise. You could cut labor costs, you know,

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Speaker 4: increase your export prices, or you could do a range

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Speaker 4: of things to manage that cost. And it could be that,

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Speaker 4: but it also could be that actual tariffs was not

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Speaker 4: as high as the statutory tariffs, and that's why the

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Speaker 4: hit was also not as good. There are a few explanations.

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Speaker 2: A lot of people have been looking into that gap,

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Speaker 2: but that's also been showing up in the revenues. We're

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Speaker 2: getting less revenues than you would expect. It's quite a

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Speaker 2: lot of revenues coming into the treasury, but there's a

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Speaker 2: bit of a gap there in terms of what the

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Speaker 2: supposed tariff revenue's rates are and what the revenues are.

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Speaker 2: So I think there's plenty of puzzles there. But ed

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Speaker 2: going back to the Fed having the markets back, I mean,

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Speaker 2: it always strikes me, and it happens a lot in

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Speaker 2: these context. There's a bit of a dilemma because the

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Speaker 2: market wants the lower interest rates, but not the thing

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Speaker 2: that would trigger the lower interest rates. So the economy

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Speaker 2: is doing well, then the stock market might feel better,

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Speaker 2: but that also makes it less likely there's going to

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Speaker 2: be a interest rates Is that a bit of an

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Speaker 2: issue for the current state of expectations.

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Speaker 1: It is, but given the range that Anna was talking about,

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Speaker 1: that's sort of like the sweet spot. The goldilocks outcome

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Speaker 1: zero to one hundred and thirty non farm payrolls. It

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Speaker 1: says that the economy's weak enough to get the FED

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Speaker 1: to cut, but not so weak that you actually are

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Speaker 1: concerned about a recession. And I think when you think

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Speaker 1: about the FED, and there's been a lot of talk

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Speaker 1: about FED independence and whether you have low rate people

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Speaker 1: or high rate people. Chris Waller, who's a FED governor,

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Speaker 1: he actually has the zeitgeist of the FED right now

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Speaker 1: in terms of anticipating that low number that we're talking

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Speaker 1: about and the lack of a pass through of inflation

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Speaker 1: enough to get the FED to cut, and I think

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Speaker 1: that the rest of the FOMC sounds like they're moving

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Speaker 1: in that direction. The market has eighty nine percent priced in,

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Speaker 1: as Anna was saying, and largely there's no way that

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Speaker 1: the FED is going to not cut when you have

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Speaker 1: the kinds of numbers. The real question is do they

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Speaker 1: cut afterwards? But I think that September is probably a

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Speaker 1: done deal at this point unless you have something incredibly

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Speaker 1: bad from the inflation number, as Anna was saying. And

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Speaker 1: so the FED has the markets back largely through September

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Speaker 1: and my view, but then afterwards that's the real question.

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Speaker 2: You started by talking about how people are conscious of

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Speaker 2: the overvaluation of the US market, and we've talked in

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Speaker 2: the past about how even though the US stock market

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Speaker 2: looked healthy in relative terms, many other markets have done

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Speaker 2: better this year, and maybe the marginal investment dollar was

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Speaker 2: more of it was going overseas now than had been

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Speaker 2: in the past. But that fundamental question of can you

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Speaker 2: afford to be so dependent on a handful of stocks.

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Speaker 2: I can't remember the figure now, but I think the

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Speaker 2: percentage that just in video alone, the producer of those

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Speaker 2: very of the absolute cutting edge chips, that its share

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Speaker 2: of the market is now I think higher than any

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Speaker 2: companies has been. What can seriously change that? What's going

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Speaker 2: to provide the reality check on that kind of concentration.

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Speaker 1: Ed The reality check is missing earnings, and in its

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Speaker 1: most dire form from an economic perspective, an incredible slowdown

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Speaker 1: that causes firms to mis earnings repeatedly and by a

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Speaker 1: large margin. So it's almost like people are holding their

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Speaker 1: noses to buy at high valuations because there's nothing that

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Speaker 1: they can do. Let's back up for a second. If

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Speaker 1: you think about what happened in April after we had

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Speaker 1: the tariffs. When the tariffs were announced, the levels were

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Speaker 1: so high and the fear of a recession was so

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Speaker 1: high that people sold on mass there was the whole

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Speaker 1: Cell America trade. What that is representative of how quickly

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Speaker 1: that almost recession for the SMP we were almost down

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Speaker 1: twenty percent formed is indication that we have weak hands.

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Speaker 1: That is, is that people are not real believers in

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Speaker 1: the market. And given the fact that we've gone up

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Speaker 1: this month since then, you would think that that same

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Speaker 1: sentiment is even higher today. But at the same time,

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Speaker 1: you're not going to be selling stocks that are actually

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Speaker 1: beating expectations, and you're not going to do that in

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Speaker 1: an economic environment that expectations are above. So I think

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Speaker 1: that over the next couple of weeks, but I would

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Speaker 1: say actually over the next six weeks, a number of

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Speaker 1: things are coming together. One we have the FED. Two,

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Speaker 1: we have expectations. That is the City surprise Index at

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Speaker 1: a very high level, and that's a mean reverting index,

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Speaker 1: meaning that the likelihood of continuing to beat economic forecast

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Speaker 1: this much will go down. And then finally in October

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Speaker 1: that's when we're going to start the next earning season.

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Speaker 1: So those three things will come together and that will

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Speaker 1: be very decisive in terms of whether or not this

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Speaker 1: particular rally can hold. And I would mention by the way,

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Speaker 1: as you said, Stephanie, the first day back, that we

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Speaker 1: had a reality check. When people came back and desks

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Speaker 1: were full, people saw not just stats but also.

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Speaker 2: Bonds, possibly because they read this piece that said September

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Speaker 2: was always terrible and the next forty trading sessions were

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Speaker 2: going to be so important. I mean, Anna, if you're

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Speaker 2: an economist, you will have been taught. Any economist, we

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Speaker 2: were all taught that independence of central banks was very

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Speaker 2: important for investors, for the stability of general confidence in

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Speaker 2: the economy. It was one of the things that made

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Speaker 2: the US an attractive market. And we've also always been

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Speaker 2: told that stability of policy making was super important. And

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Speaker 2: yet if you look at the last six months, you've

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Speaker 2: had a definitely not stable policy making and a lot

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Speaker 2: of volatility and outright questioning around the independence of the

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Speaker 2: central bank. If everything just kind of continues as it has,

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Speaker 2: do we have to kind of question that basic belief.

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Speaker 2: Maybe the central bank independence is not as important as

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Speaker 2: we thought, or is it just that it's not got

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Speaker 2: to that point yet.

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Speaker 4: I think it The mutant market reaction is about how

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Speaker 4: the market interprets the series of events. So I think

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Speaker 4: in our Washington DC bubble. We are all characterizing the

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Speaker 4: events as jeopardizing the feed's independence, but I think many

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Speaker 4: market participants are not thinking that this fundamentally jeopardized the

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Speaker 4: FED independence.

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Speaker 3: So I think FED independence.

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Speaker 4: Is very important for the stability of the US economy,

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Speaker 4: no question about it. So the market will have to

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Speaker 4: come to the point where they see that it's jeopardized

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Speaker 4: before they reacted.

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Speaker 3: I don't think they're at that point yet, But.

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Speaker 2: I guess one of the things that would perhaps stay

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Speaker 2: the President's hand in pushing ahead more aggressively would be

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Speaker 2: the sense that there was a market reaction, but he's

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Speaker 2: not seen much evidence of that. I mean ed one

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Speaker 2: tends to look to the bond market for a reaction

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Speaker 2: to these kind of concerns, and certainly most economists I

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Speaker 2: know are kind of expecting on balance inflation to be

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Speaker 2: a bit higher after j. Powell leaves because of all

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Speaker 2: the mood music that surrounded the appointment of the next

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Speaker 2: head of the Central Bank. Is it surprising that the

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Speaker 2: bomb market has also reacted so calmly to all this?

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Speaker 2: I mentioned the ten year. I guess the thirty year

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Speaker 2: moved up very slightly, but it doesn't seem like a

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Speaker 2: big deal.

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Speaker 1: All of this is relatively surprising. You can countenance the

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Speaker 1: moves based upon the lack of a recession, the fact

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Speaker 1: that we've had such a huge change in economic policy,

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Speaker 1: but largely the beat goes on. I think that the

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Speaker 1: market has become inured to all of these changes, and

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Speaker 1: they're waiting for something of great significance economically to occur,

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Speaker 1: or something of great significance to occur in terms of

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Speaker 1: earnings for the stocks. And remember, at the same time,

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Speaker 1: you're also looking at investors who are getting five percent.

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Speaker 1: Five percent in a thirty year has been very difficult

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Speaker 1: to s pass on a considered level. You know, every

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Speaker 1: time the bond market gets the thirty year to five percent,

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Speaker 1: suddenly you have buyers who swoop in and they say,

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Speaker 1: that's something i'd like to lock in. Locking in that

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Speaker 1: level of return over a thirty year period is attractive

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Speaker 1: a foreign investor that just years ago was getting something

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Speaker 1: in the order of one to two percent on very

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Speaker 1: long dated paper. So it's a very weird situation, and

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Speaker 1: I think that it's allowed to go on simply because

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Speaker 1: the economic situation has not deteriorated enough to draw a reaction.

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Speaker 2: Anna, I'll give you the last word. I said at

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Speaker 2: the start, the stock market isn't the US economy, but

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Speaker 2: they're clearly it's hard for the stock market to continue

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Speaker 2: to be strong if they are a fundamental question marks,

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Speaker 2: let alone a return of the risk of recession when

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Speaker 2: it comes to the US economy. I know you've said

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Speaker 2: in the past that it's sort of too soon to

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Speaker 2: say in terms of the impact of tariffs, but we've

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Speaker 2: also discussed reasons why the impact on inflation might not

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Speaker 2: be as large as some had feared. It looks like

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Speaker 2: the impact on the economy overall could be less than

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Speaker 2: many had feared. Do you think we're going to end

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Speaker 2: this year thinking this set of policies one way or another.

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Speaker 2: Partly because of some of the offsets that have come

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Speaker 2: with tax cuts and other things, this set of policies

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Speaker 2: from this administration is not as damaging as we might

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Speaker 2: have thought the beginning of the year.

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Speaker 4: Yeah. I think on the growth side that might be it,

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Speaker 4: because we do have the resolution of the tax policy

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Speaker 4: and that's proposing as tailwind going into next year. However,

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Speaker 4: my views on the impact of tariff on inflation has

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Speaker 4: evolved slightly. I think the upside risk on inflation is

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Speaker 4: now higher and going into the end of the year,

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Speaker 4: because even though the stock market is not the whole economy,

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Speaker 4: the stock market is the whole economy for the top

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Speaker 4: twenty percent of the population. And as long as these

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Speaker 4: top twenty percent of household are doing fine with wealth effect,

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Speaker 4: then firms will find that they will be able to

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Speaker 4: pass through these tariffs to these guys. And most of

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Speaker 4: the disinflation we have seen in the last four months

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Speaker 4: that turned the narrative of tariff and inflation over his head,

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Speaker 4: that was driven by these top twenty percent people. They're

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Speaker 4: not spending on hotels, they're not spending on airfares. But

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Speaker 4: I see that reversing in the rest of it this year.

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Speaker 4: So we might still see inflation flaring up later this year,

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Speaker 4: but not due.

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Speaker 5: To the particular teriff items which comprise of the small

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Speaker 5: part of the CPI, but in the service stuff that

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Speaker 5: these financial conditions driven spending is posing pressure.

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Speaker 2: Intriguing. Well, then we'll see how the market reacts to that.

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Speaker 2: And indeed everybody else, if anyone was looking for investment advice,

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Speaker 2: I don't think we've ended up with any. So that's

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Speaker 2: all right, good, good Anna Ed Thank you so much.

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Speaker 3: Thank you as well, happy to be here.

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Speaker 2: Thanks for listening to Trumphonomics from Bloomberg. It was hosted

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Speaker 2: by me Stephanie Flanders. I was joined by Anna Wong

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Speaker 2: and Ed Harrison. This episode was produced by Moses and

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00:23:26,800 --> 00:23:30,359
Speaker 2: Am and Summer Sadi Special thanks to Rachel Lewis Chrisky.

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00:23:30,840 --> 00:23:34,040
Speaker 2: Sound design was by Blake Maples and Sage Bowman is

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Speaker 2: Bloomberg's head of podcasts and to help others find it,

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00:23:37,760 --> 00:23:41,160
Speaker 2: please rate and review highly this show wherever you listen