Speaker 1: Bloomberg Audio Studios, podcasts, radio news. People recognize there's an overvaluation,
Speaker 1: but at the same time, there's no catalyst for dealing
Speaker 1: with that.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 2: and this is Trump Economics, the podcast that looks at
Speaker 2: the economic world of Donald Trump, how he's already shaped
Speaker 2: the global economy. What on earth is going to happen next?
Speaker 2: This week, we're doing something we don't normally do. We're
Speaker 2: talking about the stock market, the US stock market, because
Speaker 2: apparently a lot of people don't understand it. Let me explain,
Speaker 2: Like many of you, I had some holiday over the summer,
Speaker 2: and holiday inevitably means maybe having more conversations with normal
Speaker 2: human beings who don't spend their time checking the news
Speaker 2: or thinking about the state of the economy. The question
Speaker 2: I had more than any other from those normal human
Speaker 2: beings as we sat on the beach or wherever it was, was,
Speaker 2: if there's so much scary stuff happening in the US
Speaker 2: today and so much uncertainty hanging over pretty much every
Speaker 2: part of the economy, why on earth is the stock
Speaker 2: market so high? And it is a good question. The
Speaker 2: main US index s and P five hundred hit another
Speaker 2: all time high at the end of August. It's up
Speaker 2: around thirty percent since early April, when investors were very
Speaker 2: worried about all those tariffs, many of which are still
Speaker 2: in place. And that all time high in the market
Speaker 2: came just days after Donald Trump had put potentially the
Speaker 2: entire independence of the US central banking question by firing
Speaker 2: the Federal Reserve Governor Lisa Cook. So you might say
Speaker 2: it's the bomb market that needs to worry about all
Speaker 2: that about inflation and the Fed, not stocks, but the
Speaker 2: ten year bond yield, long term cost of borrowing for
Speaker 2: the US well, that actually fell after Lisa Cook was fired.
Speaker 2: So what gives I mean, we know the stock market
Speaker 2: isn't the US economy, but it is supposed to reflect
Speaker 2: reasonable expectations of US company's ability to make money in
Speaker 2: the future, and that depends on quite a lot of
Speaker 2: things that you might say President Trump had put into
Speaker 2: question the ability to trade, export and import freely, stable economy,
Speaker 2: predictable policy making. And there are quite a lot of
Speaker 2: people in the market worrying about these things. And they're
Speaker 2: also worried that the market has become way too dependent
Speaker 2: on a handful of companies, especially the ones associated with AI,
Speaker 2: but none of that has translated into a serious reversal
Speaker 2: in the market until now. Could this be the month
Speaker 2: that that changes. Well, we had a piece out earlier
Speaker 2: this week that did argue that the US stock market's
Speaker 2: fate comes down to the next fourteen trading sessions. So
Speaker 2: I thought we'd better have a quick word about what
Speaker 2: could happen in the next two weeks and what is
Speaker 2: underlying this basic confidence that we've seen in among investors
Speaker 2: in the last few months. And we don't offer investment
Speaker 2: advice on this show, thank goodness, but I did want
Speaker 2: to have an informed debate about it with two regulars
Speaker 2: who are in the DC studio talking to me now,
Speaker 2: Anna Wong, chief US economists for Bloomberg, and Ed Harrison,
Speaker 2: senior strategist for Bloomberg and author of the Everything Risk newsletter. Ed, Anna,
Speaker 2: fantastic to have you.
Speaker 3: Good to be here, Stephanie, good to be here.
Speaker 2: Thank you for sort of scrambling to do this show.
Speaker 2: Of course, as is always the way, we wanted to
Speaker 2: do something about the strength of the stock market and
Speaker 2: whether it might change. And as we're saying this on
Speaker 2: Tuesday the markets heading south. So we were either very
Speaker 2: precient or have once again sort of been counterindicators. But
Speaker 2: I mean ed that you may have had the same
Speaker 2: experience I had over the summer that ordinary sort of
Speaker 2: bystanders of the US economy just find it pretty curious
Speaker 2: that the stock market's been so strong.
Speaker 1: Yes, definitely. I would say that a lot of people
Speaker 1: I've spoken to are thinking there's a relative amount of
Speaker 1: chaos in terms of the economic order, and they're wondering,
Speaker 1: how is it possible that the market is up so much.
Speaker 1: I would start out the conversation by noting that the
Speaker 1: last Bank of America fund manager report had ninety one
Speaker 1: percent of fund manager saying that US equities were overvalued.
Speaker 1: So that's a lot that's pretty much everyone. And so
Speaker 1: what it says to you, were they say they should
Speaker 1: sell the exactly? I think that's the problem. The problem
Speaker 1: is is that Number One, when you look at the
Speaker 1: economic surprises in the last month or so, last two months,
Speaker 1: they've been to the upside. Number Two, the last earning season,
Speaker 1: particularly from those stocks that you were talking about, where
Speaker 1: the concentration was very good. All of those companies, even
Speaker 1: when there were some problems like data centers at Nvidia,
Speaker 1: also with Amazon and their AWS unit, they still overall
Speaker 1: had numbers that were stellar, better than the overall market
Speaker 1: in fact, and better than expectations, and so that's what's
Speaker 1: driving the market higher. It's very difficult to sell when
Speaker 1: the stocks that you would sell are actually beating expectations
Speaker 1: and the economy overall is doing better than expected. And
Speaker 1: so you have this dichotomy playing out where people recognize
Speaker 1: there's an overvaluation, but at the same time there's no
Speaker 1: catalyst for dealing with that.
Speaker 2: And actually, on the subject of catalysts, the piece I
Speaker 2: referenced about the next fourteen trading sessions, I mean we're
Speaker 2: straight after Labor Day now in the US early September,
Speaker 2: there's always a kind of back to school feeling also
Speaker 2: for the market, and as that piece pointed out, September
Speaker 2: is often a pretty choppy month for the market. In
Speaker 2: these kind of key bits of news we're going to
Speaker 2: get over the next couple of weeks, do you think
Speaker 2: they could be critical for the momentum of the market.
Speaker 1: Yeah, this is probably where and is going to come
Speaker 1: in at some point, because ultimately a lot of this
Speaker 1: has to do with the FED on some level. Two
Speaker 1: things that the market thinks in terms of this Fed's
Speaker 1: got the market's back, and overall, there's really no reason
Speaker 1: when the economy's going higher and the Fed's got our
Speaker 1: back to sell. What we found in particular with large
Speaker 1: investors is that they relate to the game when Donald
Speaker 1: Trump reversed his tariffs early on, small investors bought the
Speaker 1: dip and then people had to chase those returns and
Speaker 1: that's driven the market higher. And now we're getting to
Speaker 1: a point where the FED could potentially cut, and so
Speaker 1: the question is are they going to cut? When we
Speaker 1: talk about the next fourteen trading days, that's the terminal
Speaker 1: date in those days the Fed finally being able to cut,
Speaker 1: Will they cut, how much will they cut? Will there
Speaker 1: be the centers and so forth. I think that that's
Speaker 1: the critical test over the next three weeks.
Speaker 2: Will go through some of the individual data, but just
Speaker 2: sort of broadly, when Ed talks about, you know, he's
Speaker 2: coming from the market perspective. This is what people in
Speaker 2: the markets want to see in this sense of the
Speaker 2: FED having our back quote unquotes, do you think they're
Speaker 2: going to get what they need? Do you think this
Speaker 2: is going to be a reassuring couple of weeks for
Speaker 2: US dot market or something a bit more volatile.
Speaker 3: So we have two more key data point.
Speaker 4: One is the jobs report this Friday, and also a
Speaker 4: CPI report. The market thinks that the jobs report is
Speaker 4: all that matters, and CPI has this really high for
Speaker 4: it to shop September rate cut. So now this jobs report, well,
Speaker 4: there's barely any consensus. The range of forecasts out there
Speaker 4: goes from zero to one hundred thirty thousand, and I
Speaker 4: think even for unemployment right there's people thinking it's could
Speaker 4: be four point two, four point one, four part three.
Speaker 4: So I think that if the unemployment rate were to
Speaker 4: edge down surprisingly, I think that could well cost a
Speaker 4: market to price away a September rate cut back to
Speaker 4: right now, the probability of a rate cut in September
Speaker 4: is eighty nine percent according to a futures market. I mean,
Speaker 4: if the jobs report was surprisingly strong, we could see
Speaker 4: probability go go back down to sixty or fifty five
Speaker 4: or something vague, and then it will become a coin toss.
Speaker 4: And that's I think that's the type of stuff the
Speaker 4: stock market doesn't like, which is uncertainty.
Speaker 3: I don't know if ED will agree we'll.
Speaker 2: Go back to that, because it seems like there's been
Speaker 2: a lot of uncertain over the last few months that
Speaker 2: they've managed to struggle, but they are obviously very focused
Speaker 2: on these numbers. Just to touch on the inflation aspect,
Speaker 2: because one of the factors that had led traders to
Speaker 2: have a higher expectation of a rate cut from the
Speaker 2: Fed this month, along with the weaker labor market figures
Speaker 2: that we had, was also in the inflation numbers. So
Speaker 2: is there anything there that could change the way the
Speaker 2: Fed and then potentially the market is thinking.
Speaker 4: What I've heard from the markets is that CPI has
Speaker 4: to be really high, say zero point four point five,
Speaker 4: to be a game changer for a rate cut, and
Speaker 4: I think it would be.
Speaker 2: Just remind us what it is now.
Speaker 3: So in the.
Speaker 4: Past four months it has been fluctuating between point one
Speaker 4: two point three, and only in the last month had
Speaker 4: CPI it comes to point three, But previously.
Speaker 2: That's the increase in just the month, Yeah, just the month,
Speaker 2: So point four the annual rate is the annual rate
Speaker 2: is in the high two. I think I believe two
Speaker 2: point nine or close to three point zero, but a
Speaker 2: point four point five annual increase would be if you
Speaker 2: analyze that would be corresponding to four to five percent inflation.
Speaker 2: This is why point four five are super ugly readings.
Speaker 2: But you're not expecting that because you've looked at how
Speaker 2: the impact of tariffs, for example, on prices, and we've
Speaker 2: not been seeing those kind of numbers at least not yet.
Speaker 4: Is that right, well, Stephanie, our view on this is
Speaker 4: very dynamic in the sense that passed through on tariff
Speaker 4: is not static.
Speaker 3: Firms will only pass through if they can.
Speaker 4: And so this second quarter earning seasons, which I think
Speaker 4: market participants took us overall quite encouraging, was that there's
Speaker 4: not much evidence that firms profits are hit by these
Speaker 4: tariff which was the piece of puzzle for me because
Speaker 4: our view had been that, well, maybe tariffs won't translate
Speaker 4: into inflation so fast because firms will be eating it
Speaker 4: through profit compression. But so far we have not seen
Speaker 4: much tariff passed through in CPI, we have not seen
Speaker 4: much profit compression and firms. But we do know that
Speaker 4: US firms are taking the front of the tariff. So
Speaker 4: who in US is really taking the brunt of the tariff.
Speaker 4: It's like the doc that did Doc bark In like
Speaker 4: Sherlock's home tail.
Speaker 2: Okay, so is it possible that Donald Trump is right
Speaker 2: and it's those foreigners that are paying that.
Speaker 4: I don't think no. I think the evidence is still
Speaker 4: pretty firm on that, although I have been hearing some
Speaker 4: very esoteric explanations, which is that foreigners are not cutting
Speaker 4: the price they sold to the US importer. However, they're
Speaker 4: offering credits on exports services, which is why import indices
Speaker 4: will never capture any discounts. This is just a very
Speaker 4: offbeat explanation which I've heard from a few people now.
Speaker 4: So I think we need to examine that. Usually in
Speaker 4: the importer US also exports, so if they get some
Speaker 4: credit on the expert side, maybe that helps cushion something.
Speaker 4: I don't know, because at the end of the day,
Speaker 4: from a firm's perspective, it's about managing this cost increase
Speaker 4: imports tariff rise. You could cut labor costs, you know,
Speaker 4: increase your export prices, or you could do a range
Speaker 4: of things to manage that cost. And it could be that,
Speaker 4: but it also could be that actual tariffs was not
Speaker 4: as high as the statutory tariffs, and that's why the
Speaker 4: hit was also not as good. There are a few explanations.
Speaker 2: A lot of people have been looking into that gap,
Speaker 2: but that's also been showing up in the revenues. We're
Speaker 2: getting less revenues than you would expect. It's quite a
Speaker 2: lot of revenues coming into the treasury, but there's a
Speaker 2: bit of a gap there in terms of what the
Speaker 2: supposed tariff revenue's rates are and what the revenues are.
Speaker 2: So I think there's plenty of puzzles there. But ed
Speaker 2: going back to the Fed having the markets back, I mean,
Speaker 2: it always strikes me, and it happens a lot in
Speaker 2: these context. There's a bit of a dilemma because the
Speaker 2: market wants the lower interest rates, but not the thing
Speaker 2: that would trigger the lower interest rates. So the economy
Speaker 2: is doing well, then the stock market might feel better,
Speaker 2: but that also makes it less likely there's going to
Speaker 2: be a interest rates Is that a bit of an
Speaker 2: issue for the current state of expectations.
Speaker 1: It is, but given the range that Anna was talking about,
Speaker 1: that's sort of like the sweet spot. The goldilocks outcome
Speaker 1: zero to one hundred and thirty non farm payrolls. It
Speaker 1: says that the economy's weak enough to get the FED
Speaker 1: to cut, but not so weak that you actually are
Speaker 1: concerned about a recession. And I think when you think
Speaker 1: about the FED, and there's been a lot of talk
Speaker 1: about FED independence and whether you have low rate people
Speaker 1: or high rate people. Chris Waller, who's a FED governor,
Speaker 1: he actually has the zeitgeist of the FED right now
Speaker 1: in terms of anticipating that low number that we're talking
Speaker 1: about and the lack of a pass through of inflation
Speaker 1: enough to get the FED to cut, and I think
Speaker 1: that the rest of the FOMC sounds like they're moving
Speaker 1: in that direction. The market has eighty nine percent priced in,
Speaker 1: as Anna was saying, and largely there's no way that
Speaker 1: the FED is going to not cut when you have
Speaker 1: the kinds of numbers. The real question is do they
Speaker 1: cut afterwards? But I think that September is probably a
Speaker 1: done deal at this point unless you have something incredibly
Speaker 1: bad from the inflation number, as Anna was saying. And
Speaker 1: so the FED has the markets back largely through September
Speaker 1: and my view, but then afterwards that's the real question.
Speaker 2: You started by talking about how people are conscious of
Speaker 2: the overvaluation of the US market, and we've talked in
Speaker 2: the past about how even though the US stock market
Speaker 2: looked healthy in relative terms, many other markets have done
Speaker 2: better this year, and maybe the marginal investment dollar was
Speaker 2: more of it was going overseas now than had been
Speaker 2: in the past. But that fundamental question of can you
Speaker 2: afford to be so dependent on a handful of stocks.
Speaker 2: I can't remember the figure now, but I think the
Speaker 2: percentage that just in video alone, the producer of those
Speaker 2: very of the absolute cutting edge chips, that its share
Speaker 2: of the market is now I think higher than any
Speaker 2: companies has been. What can seriously change that? What's going
Speaker 2: to provide the reality check on that kind of concentration.
Speaker 1: Ed The reality check is missing earnings, and in its
Speaker 1: most dire form from an economic perspective, an incredible slowdown
Speaker 1: that causes firms to mis earnings repeatedly and by a
Speaker 1: large margin. So it's almost like people are holding their
Speaker 1: noses to buy at high valuations because there's nothing that
Speaker 1: they can do. Let's back up for a second. If
Speaker 1: you think about what happened in April after we had
Speaker 1: the tariffs. When the tariffs were announced, the levels were
Speaker 1: so high and the fear of a recession was so
Speaker 1: high that people sold on mass there was the whole
Speaker 1: Cell America trade. What that is representative of how quickly
Speaker 1: that almost recession for the SMP we were almost down
Speaker 1: twenty percent formed is indication that we have weak hands.
Speaker 1: That is, is that people are not real believers in
Speaker 1: the market. And given the fact that we've gone up
Speaker 1: this month since then, you would think that that same
Speaker 1: sentiment is even higher today. But at the same time,
Speaker 1: you're not going to be selling stocks that are actually
Speaker 1: beating expectations, and you're not going to do that in
Speaker 1: an economic environment that expectations are above. So I think
Speaker 1: that over the next couple of weeks, but I would
Speaker 1: say actually over the next six weeks, a number of
Speaker 1: things are coming together. One we have the FED. Two,
Speaker 1: we have expectations. That is the City surprise Index at
Speaker 1: a very high level, and that's a mean reverting index,
Speaker 1: meaning that the likelihood of continuing to beat economic forecast
Speaker 1: this much will go down. And then finally in October
Speaker 1: that's when we're going to start the next earning season.
Speaker 1: So those three things will come together and that will
Speaker 1: be very decisive in terms of whether or not this
Speaker 1: particular rally can hold. And I would mention by the way,
Speaker 1: as you said, Stephanie, the first day back, that we
Speaker 1: had a reality check. When people came back and desks
Speaker 1: were full, people saw not just stats but also.
Speaker 2: Bonds, possibly because they read this piece that said September
Speaker 2: was always terrible and the next forty trading sessions were
Speaker 2: going to be so important. I mean, Anna, if you're
Speaker 2: an economist, you will have been taught. Any economist, we
Speaker 2: were all taught that independence of central banks was very
Speaker 2: important for investors, for the stability of general confidence in
Speaker 2: the economy. It was one of the things that made
Speaker 2: the US an attractive market. And we've also always been
Speaker 2: told that stability of policy making was super important. And
Speaker 2: yet if you look at the last six months, you've
Speaker 2: had a definitely not stable policy making and a lot
Speaker 2: of volatility and outright questioning around the independence of the
Speaker 2: central bank. If everything just kind of continues as it has,
Speaker 2: do we have to kind of question that basic belief.
Speaker 2: Maybe the central bank independence is not as important as
Speaker 2: we thought, or is it just that it's not got
Speaker 2: to that point yet.
Speaker 4: I think it The mutant market reaction is about how
Speaker 4: the market interprets the series of events. So I think
Speaker 4: in our Washington DC bubble. We are all characterizing the
Speaker 4: events as jeopardizing the feed's independence, but I think many
Speaker 4: market participants are not thinking that this fundamentally jeopardized the
Speaker 4: FED independence.
Speaker 3: So I think FED independence.
Speaker 4: Is very important for the stability of the US economy,
Speaker 4: no question about it. So the market will have to
Speaker 4: come to the point where they see that it's jeopardized
Speaker 4: before they reacted.
Speaker 3: I don't think they're at that point yet, But.
Speaker 2: I guess one of the things that would perhaps stay
Speaker 2: the President's hand in pushing ahead more aggressively would be
Speaker 2: the sense that there was a market reaction, but he's
Speaker 2: not seen much evidence of that. I mean ed one
Speaker 2: tends to look to the bond market for a reaction
Speaker 2: to these kind of concerns, and certainly most economists I
Speaker 2: know are kind of expecting on balance inflation to be
Speaker 2: a bit higher after j. Powell leaves because of all
Speaker 2: the mood music that surrounded the appointment of the next
Speaker 2: head of the Central Bank. Is it surprising that the
Speaker 2: bomb market has also reacted so calmly to all this?
Speaker 2: I mentioned the ten year. I guess the thirty year
Speaker 2: moved up very slightly, but it doesn't seem like a
Speaker 2: big deal.
Speaker 1: All of this is relatively surprising. You can countenance the
Speaker 1: moves based upon the lack of a recession, the fact
Speaker 1: that we've had such a huge change in economic policy,
Speaker 1: but largely the beat goes on. I think that the
Speaker 1: market has become inured to all of these changes, and
Speaker 1: they're waiting for something of great significance economically to occur,
Speaker 1: or something of great significance to occur in terms of
Speaker 1: earnings for the stocks. And remember, at the same time,
Speaker 1: you're also looking at investors who are getting five percent.
Speaker 1: Five percent in a thirty year has been very difficult
Speaker 1: to s pass on a considered level. You know, every
Speaker 1: time the bond market gets the thirty year to five percent,
Speaker 1: suddenly you have buyers who swoop in and they say,
Speaker 1: that's something i'd like to lock in. Locking in that
Speaker 1: level of return over a thirty year period is attractive
Speaker 1: a foreign investor that just years ago was getting something
Speaker 1: in the order of one to two percent on very
Speaker 1: long dated paper. So it's a very weird situation, and
Speaker 1: I think that it's allowed to go on simply because
Speaker 1: the economic situation has not deteriorated enough to draw a reaction.
Speaker 2: Anna, I'll give you the last word. I said at
Speaker 2: the start, the stock market isn't the US economy, but
Speaker 2: they're clearly it's hard for the stock market to continue
Speaker 2: to be strong if they are a fundamental question marks,
Speaker 2: let alone a return of the risk of recession when
Speaker 2: it comes to the US economy. I know you've said
Speaker 2: in the past that it's sort of too soon to
Speaker 2: say in terms of the impact of tariffs, but we've
Speaker 2: also discussed reasons why the impact on inflation might not
Speaker 2: be as large as some had feared. It looks like
Speaker 2: the impact on the economy overall could be less than
Speaker 2: many had feared. Do you think we're going to end
Speaker 2: this year thinking this set of policies one way or another.
Speaker 2: Partly because of some of the offsets that have come
Speaker 2: with tax cuts and other things, this set of policies
Speaker 2: from this administration is not as damaging as we might
Speaker 2: have thought the beginning of the year.
Speaker 4: Yeah. I think on the growth side that might be it,
Speaker 4: because we do have the resolution of the tax policy
Speaker 4: and that's proposing as tailwind going into next year. However,
Speaker 4: my views on the impact of tariff on inflation has
Speaker 4: evolved slightly. I think the upside risk on inflation is
Speaker 4: now higher and going into the end of the year,
Speaker 4: because even though the stock market is not the whole economy,
Speaker 4: the stock market is the whole economy for the top
Speaker 4: twenty percent of the population. And as long as these
Speaker 4: top twenty percent of household are doing fine with wealth effect,
Speaker 4: then firms will find that they will be able to
Speaker 4: pass through these tariffs to these guys. And most of
Speaker 4: the disinflation we have seen in the last four months
Speaker 4: that turned the narrative of tariff and inflation over his head,
Speaker 4: that was driven by these top twenty percent people. They're
Speaker 4: not spending on hotels, they're not spending on airfares. But
Speaker 4: I see that reversing in the rest of it this year.
Speaker 4: So we might still see inflation flaring up later this year,
Speaker 4: but not due.
Speaker 5: To the particular teriff items which comprise of the small
Speaker 5: part of the CPI, but in the service stuff that
Speaker 5: these financial conditions driven spending is posing pressure.
Speaker 2: Intriguing. Well, then we'll see how the market reacts to that.
Speaker 2: And indeed everybody else, if anyone was looking for investment advice,
Speaker 2: I don't think we've ended up with any. So that's
Speaker 2: all right, good, good Anna Ed Thank you so much.
Speaker 3: Thank you as well, happy to be here.
Speaker 2: Thanks for listening to Trumphonomics from Bloomberg. It was hosted
Speaker 2: by me Stephanie Flanders. I was joined by Anna Wong
Speaker 2: and Ed Harrison. This episode was produced by Moses and
Speaker 2: Am and Summer Sadi Special thanks to Rachel Lewis Chrisky.
Speaker 2: Sound design was by Blake Maples and Sage Bowman is
Speaker 2: Bloomberg's head of podcasts and to help others find it,
Speaker 2: please rate and review highly this show wherever you listen