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Speaker 2: This is the Bloomberg Surveillance Podcast. I'm Jonathan Ferrow, along
Speaker 2: with Lisa Bromwitz and Amrie Hordern. Join us each day
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Speaker 2: with stockslower after snapping a six day winning streak in
Speaker 2: yesterday's session. Sarah Maleck of Neuvine writing markets face a
Speaker 2: reality check due to two macro drivers, Moodies Downgroad of
Speaker 2: US dead and continued tariff negotiations. Sarah joins Ustaff for more.
Speaker 2: Sarah and Mornig, good morning. How important is that tax
Speaker 2: bill to this bond market?
Speaker 3: I think it's very important to this spawn market. What
Speaker 3: the bond market is worried about is that over the
Speaker 3: longer term it will increase the deficit, and the bond
Speaker 3: market doesn't like that. And that's where we're seeing yields
Speaker 3: continue to back up, so we'll see where we end
Speaker 3: up on that and the shorter term though the tax bill,
Speaker 3: of course, will be stimulative for the economy, so it's
Speaker 3: positive for the short term, not so positive for the
Speaker 3: long term.
Speaker 2: Bonios at these levels and not constraining the discussion that
Speaker 2: about down in Washington, when does it start to constrain
Speaker 2: the sanquity market.
Speaker 3: I think at about five percent on the ten year,
Speaker 3: equities will begin to get more nervous. Also, beyond the
Speaker 3: tariff issues and the Moody's downgrade and downgrades of US
Speaker 3: credit has generally not been positive for the markets. We
Speaker 3: have bubbling up geopolitical issues between Iran and Israel, so
Speaker 3: there's a lot of things for the markets to contend with,
Speaker 3: and I think that's why equities are experiencing a hangover
Speaker 3: this week.
Speaker 4: Was there any signal in the fact that you got
Speaker 4: those bubbling up of tensions, the CNN report of Israel
Speaker 4: looking at a strike in Iran, and the only movement
Speaker 4: and change you really saw was in the oil price.
Speaker 4: We were still selling treasuries, we were still selling the dollar.
Speaker 4: Typically you'd expect those types of assets to rally. What
Speaker 4: does that tell you.
Speaker 3: I think it's telling me there is a little bit
Speaker 3: of this nervousness around the US as a safe haven
Speaker 3: because of the tariff issues and the macro folatility that
Speaker 3: we've seen this year. So I think the dollar continues
Speaker 3: to be bearish in the longer term, not only because
Speaker 3: the US economy is slowing, but because foreign investors are
Speaker 3: a little bit concerned about the strength of the dollar
Speaker 3: and the safe haven status, and they're seeing the same
Speaker 3: thing with treasuries in terms of foreign buyers there, and
Speaker 3: that is becoming somewhat of an issue that's been going
Speaker 3: on all year.
Speaker 4: Can that ex sense to the equity market? Serena tang
Speaker 4: Over at Morgan Stanley wrote a note just moments ago
Speaker 4: overweight on US stock saying, still, Tina, there is still
Speaker 4: no alternative? Is there an alternative to American stock markets?
Speaker 3: Well, if you look at US stocks, stocks will trade
Speaker 3: on the fundamentals. First quarter earnings very strong, coming in
Speaker 3: at about double the rate of expectations, twelve percent year
Speaker 3: over your earnings growth, about three quarters of companies beating earnings,
Speaker 3: so earning even then positive. And if you look at markets,
Speaker 3: since they were covered off the bottom, you've seen a
Speaker 3: lot of FOMO, a lot of inter a day buying,
Speaker 3: so when you see these dips, retail investors are stepping
Speaker 3: back in to buy. Also a lot of cash on
Speaker 3: the sidelines. People do tend to unfortunately sell at the
Speaker 3: wrong time and then chase their way back into the market.
Speaker 3: So I think there is still more buys to the
Speaker 3: upside for the US led by technology.
Speaker 4: Sucks more buys even though we are back at really
Speaker 4: lofty multiples. Sarah, I thought this was part of the
Speaker 4: problem to start the year, that we were just over exposed.
Speaker 4: The US has not magically gone away.
Speaker 3: I think the US has fundamentally strong reasons for people
Speaker 3: wanting to be exposed to it. It's a thirty percent
Speaker 3: of the S and P five hundred, actually over thirty
Speaker 3: percent is technology related. If you look at historical earnings growth,
Speaker 3: about two thirds of that has been driven by those
Speaker 3: tech earnings. We saw a very strong first quarter. The
Speaker 3: AI boom is alive and well. We heard that from
Speaker 3: companies like Microsoft this quarter, So I think the growth
Speaker 3: legs for the US are still intact in place. I
Speaker 3: totally agree with you. Markets are trading at a premium,
Speaker 3: but a lot of people want to get back into
Speaker 3: this US market, and I think that plus the earnings
Speaker 3: growth gives it legs.
Speaker 2: From here, you'll line you just said it. The II
Speaker 2: boom is alive and well, several months ago, it didn't
Speaker 2: feel that way the original disruption in twenty twenty five
Speaker 2: DAP's sake. Have we ever come that?
Speaker 3: I think we did. I think Deepsek was the big
Speaker 3: story of the year for about a month and then
Speaker 3: we got into tariffs and everybody forgot about Deep Seek.
Speaker 3: It is something to watch. So the incremental spending on
Speaker 3: artificial intelligence and what's going to be the ROI on that,
Speaker 3: and also competing cheaper technologies like deep seak need to
Speaker 3: be watched. But what we see with these companies is
Speaker 3: demand for artificial intelligence. The productivity it can add to
Speaker 3: companies is very strong. And these dominant players like Microsoft
Speaker 3: that have spent tens of billions to get a leadership position,
Speaker 3: they're going to remain in place as a leader.
Speaker 2: Have the win has changed? I think that is the
Speaker 2: ultimate question. Has anything changed post Deepseek?
Speaker 3: I think that the winners are going to continue to win,
Speaker 3: Like Microsoft. Other areas that we like are software companies
Speaker 3: which I think people wondered, what is AI going to
Speaker 3: do to software companies? I think for software it makes
Speaker 3: them more productive. Also, it's showing traction in terms of
Speaker 3: capturing clients and crossling with clients. So that's why we
Speaker 3: like not only Microsoft, but companies like Viva, which is
Speaker 3: a vertical industry software play in the life sciences industry.
Speaker 3: I think these are some of the winners over time.
Speaker 3: You need to be selective, but AI and the ones
Speaker 3: that have dominated it for many years are going to
Speaker 3: stay the leaders in the space.
Speaker 4: Honestly, it's remarkable looking at what's improved since the April
Speaker 4: nay dear. First you get the communication services again, those
Speaker 4: kind of big AI names number two and even before
Speaker 4: the infotech sector is utilities again, a very AI exposed
Speaker 4: kind of sector. Is that still the play again? Post
Speaker 4: deep Seek? The thought was is that we won't need
Speaker 4: as much energy that things have become more efficient. Can
Speaker 4: you still bet on the utility players?
Speaker 3: I think you can, especially live in the infrastructure space,
Speaker 3: which a big component of infrastructure is utility, So upgrading
Speaker 3: your grids because of the electrification of the economy, supply
Speaker 3: chains coming back down, coming back to the United States
Speaker 3: and the infrastructure that we need to build. Their utilities
Speaker 3: are going to be very necessary. There the energy needed
Speaker 3: for data centers, which will be more proliferate in the
Speaker 3: in the United States. All of that I think makes
Speaker 3: utilities continue to be a strong play and a nice
Speaker 3: AI derivative play.
Speaker 4: So these are the sectors that haven't been downgrading their
Speaker 4: earnings as much. Where you have seen the downgrades comes
Speaker 4: from the more consumer oriented sectors. You saw from Target
Speaker 4: earnings this morning, some concern there in terms of demand.
Speaker 4: You hear Walmart talking about raising prices. Can you buy
Speaker 4: consumer oriented stocks right now? Or are things just too uncertain?
Speaker 3: Which consumer's in a tough space that it did lead
Speaker 3: us out of the v shape or covery post the
Speaker 3: Liberation Day malaise that we saw soft data on the
Speaker 3: consumer is not strong. Outlooks from companies about the consumer
Speaker 3: we're weak. We have not seen the impact of tariffs yet.
Speaker 3: History tells us we will see that about three to
Speaker 3: four months after tariff implementation. So it's very unclear, not
Speaker 3: only in terms of tariffs, who's going to eat them?
Speaker 3: Is it the consumer? Is it the producers. I think
Speaker 3: it's a combination of both. Margin expansion has been what
Speaker 3: has driven a lot of companies' earnings growth though, So
Speaker 3: if companies are going to eat that cost of tariffs
Speaker 3: and margins get at risk, it is probably some downside
Speaker 3: for earnings growth going forward. Good news, we're at a
Speaker 3: high level, growing at twelve percent year over year. I
Speaker 3: think consumer is going to be challenged from here though,
Speaker 3: high end consumer, low end consumer. Both areas could be challenged.
Speaker 3: But the tax cuts in that bill could be somewhat
Speaker 3: of a support form. But it's not our top pick
Speaker 3: for a sector this year.
Speaker 2: You mentioned the self data, typically considered to be a
Speaker 2: leading indicator. Do you believe it's a leading indicator or
Speaker 2: a mislead in the kits at the moment, I think.
Speaker 3: It's mixed because it's tough with the consumer. Consumers tend
Speaker 3: to be grumpy spenders, so when you see consumer spending
Speaker 3: consumer sentiment weak, that's not necessarily a sign that consumers
Speaker 3: are going to pull back on their spending. We've seen
Speaker 3: a very resilient consumer during this cycle already in a
Speaker 3: period of high inflation and high interstates, and remember pre
Speaker 3: the tariffs, inflation has been trending in the right direction.
Speaker 3: So if you add in about a ten percent based
Speaker 3: tariff rate that adds about one percent to inflation, takes
Speaker 3: you back to about that three percent level. If the
Speaker 3: Fed sticks to their commitment to view tariff driven inflation
Speaker 3: as transitory, and they get the couple of rate custs
Speaker 3: this year, we think we'll see two, then maybe we
Speaker 3: can get through this and consumer remains okay.
Speaker 2: If if the Fed sticks on a lot of if there
Speaker 2: any resents belief they won't stick to that view.
Speaker 3: I think it really depends if the tariffs and inflation
Speaker 3: driven by tariffs is really transitory, and if the underlying
Speaker 3: base rate of tear of inflation continues to moderate as
Speaker 3: we've been seeing. So that's really you know. I think
Speaker 3: it's hard to say because all of this data from
Speaker 3: Terra so we're not seeing it in the hard data.
Speaker 3: Yet the economy looks pretty strong, earnings have been strong.
Speaker 2: I can I match this question. How will they know?
Speaker 2: How are they not a difference between what's short lift
Speaker 2: and most persistent? And how long is that going to
Speaker 2: take to find out?
Speaker 4: Presumably it'll take a while to find out if inflation
Speaker 4: is transitory. When do you see that? Do not see
Speaker 4: it until next year? And then do you risk the
Speaker 4: scenario where the FED is very reactionary and then they
Speaker 4: only start cutting when you actually look at the whites
Speaker 4: of the eyes of a labor market that's deteriorating.
Speaker 2: Are they too late that you mentioned Mike Key Pinalia
Speaker 2: from Mulke and Stanley. No cuts for twenty twenty five, hey, places,
Speaker 2: They're going to have to wipe that long get to
Speaker 2: twenty six.
Speaker 3: I think the FED would run the risk of falling
Speaker 3: behind the curve if they wait for the employment market
Speaker 3: to crack. Looking at history, employment markets tend to crack
Speaker 3: at the beginning of a recession. That's going to be
Speaker 3: too late. I think they need to step in. If
Speaker 3: inflation is trending in the right direction outside of teriff,
Speaker 3: I think the FED needs to step in and get
Speaker 3: that first cut going sometime this summer or in the
Speaker 3: latest fall.
Speaker 2: Sarah, fiscal stamulus is good for mal kits, fiscal recklessness
Speaker 2: is not. We've been asking this question or way on
Speaker 2: this program. Do you think this is fisk stimulus or
Speaker 2: fiscal recklessness.
Speaker 3: Well, the answer is it could be both, depending on
Speaker 3: your timeframe. Shorter term fiscal stimulus longer term. Your risk
Speaker 3: is that if you can continue to increase this deficit,
Speaker 3: and we go into a recession, the deficit as a
Speaker 3: percent of GDP will basically blow out because tax rects
Speaker 3: will be down significantly when you're in a recession. So
Speaker 3: that's the question for the markets. Do you want to
Speaker 3: focus on the shorter term or the longer term. I
Speaker 3: think right now markets are focused on the shorter term.
Speaker 3: They're saying earning's growth is in the double digits. Hard
Speaker 3: economic data looks fine. We like the stimulus that's coming
Speaker 3: to the markets. Equities like that.
Speaker 4: What is the mechanism for us to concentrate on the
Speaker 4: longer term? What changes need to happen, What do we
Speaker 4: need to see that makes us concerned about rising deficits
Speaker 4: and the potential recklessness of it.
Speaker 3: I think bond markets are the ones that are giving
Speaker 3: you the yellow flag and saying, you know, something perhaps
Speaker 3: isn't right here. Over the longer term, I think the
Speaker 3: equity markets will pay attention. If yield to continue to rise,
Speaker 3: if borrowing becomes even much more expensive, we're living in
Speaker 3: a period of higher for longer inflation and interest rates,
Speaker 3: equities will become more nervous. So it's the degree of
Speaker 3: the rate of change in yields that's going to impact
Speaker 3: equity markets, but we're not seeing that yet at this point.
Speaker 3: I mean, this deficit has been something I feel like
Speaker 3: we've discussed for so long. It's been an issue for years,
Speaker 3: and really equities have somewhat ignored it, and I don't
Speaker 3: think that can go on forever. But at this point,
Speaker 3: I think we need to see a little more damage
Speaker 3: done by the bond markets before it becomes front center
Speaker 3: for equities.
Speaker 4: Is it also then distracting for what has been the
Speaker 4: concern for the equity market until very recently, which is terras.
Speaker 4: Sure you have ninety day pauses going on all around,
Speaker 4: but teriff freights are still set to be much higher.
Speaker 4: Are we getting distracted by taxes right now? Does the
Speaker 4: equity market at some point come around to the concerns
Speaker 4: of the damage done by higher prices coming in for importers.
Speaker 3: I mean, taxes are definitely the story of right now.
Speaker 3: But in a couple of months we're going to see
Speaker 3: the impacts on the economy from terras. If you look
Speaker 3: at that baseline of about ten percent terrists for the
Speaker 3: rest of the world, you actually skirt a recession. It
Speaker 3: impacts GDP by about one and a half percent, and
Speaker 3: you don't go into a deepercession. Of course, a lot
Speaker 3: of their reability around these numbers and the level of
Speaker 3: terrorists that we eventually end up with. But I think
Speaker 3: the markets right now we're seeing we have a little
Speaker 3: bit of visibility on where terrass fed end up and
Speaker 3: what that might do for the economy. And we have
Speaker 3: some reassurances from the Fed in terms of how they're
Speaker 3: going to think about terrorists. And that's what I mean
Speaker 3: markets are counting on. It's a fine line. It's a
Speaker 3: tightrope that they're walking in this sense with premium multiples.
Speaker 5: But I do think that.
Speaker 3: US tech is where the earnings growth is. That's what
Speaker 3: can continue to lead. But let's not forget the other
Speaker 3: surprise of the year, which is international markets. I don't
Speaker 3: think anyone expected them to outperform US markets to the
Speaker 3: degree that they have.
Speaker 2: European banks to stand. The year just absolutely phenomenal ceremonic
Speaker 2: ofneving Sarah go to see you ye decide. I always
Speaker 2: appreciate it.
Speaker 6: Lawmakers on Capitol Hill, they're working through the night through
Speaker 6: this Rules Committee, this hearing, the first panel. This hearing
Speaker 6: wrapped up at four point thirty in the morning, so
Speaker 6: you can just expect how long this may drag out
Speaker 6: is going to be a slog But we do know
Speaker 6: behind the scenes there were some deals cut and for
Speaker 6: some more insight on that, we want to bring in
Speaker 6: Terry Haynes and Penji a policy. Terry, you've seen the reporting,
Speaker 6: I'm sure, and I'm sure you have a little bit
Speaker 6: more insight. What do you make of the deal cut
Speaker 6: when it comes to salt as well as pulling back
Speaker 6: some of those clean energy investment? Is that going to
Speaker 6: be enough to satisfy some of the naysayers?
Speaker 7: Good morning, and I think I think it probably is. Yeah.
Speaker 7: The you know, the salt deduction, of course, has been
Speaker 7: has been talked about quite a bit, so I won't reiterate,
Speaker 7: but it sounds like that deal is going to be enough,
Speaker 7: and as you pointed out earlier, we haven't seen it
Speaker 7: papered yet, so so that may take a little bit
Speaker 7: of time.
Speaker 3: And the.
Speaker 7: Green energy phase outs also are things that Republicans have
Speaker 7: been interested in for quite some time, and so I imagine
Speaker 7: the combination of that is going to be is going
Speaker 7: to be enough. But Johnson will use the Memorial Day recess.
Speaker 7: Kind of a hard backstop. This is kind of standard
Speaker 7: procedure on the Hill and in the House particularly, a
Speaker 7: hard backstop to get people to put up or shut up.
Speaker 7: And I expect he'll have enough votes at the end
Speaker 7: of the day.
Speaker 6: Of course, Congress needs a deadline in order to really
Speaker 6: get something done. Terry, But even if Johnson is able
Speaker 6: to get this through the House floor, give our audience
Speaker 6: a sense of how difficult this is going to be.
Speaker 6: When this bill goes to the Senate. Does it even
Speaker 6: look recognizable when it.
Speaker 7: Comes back to the House, Well, it's going to look
Speaker 7: different than the House.
Speaker 1: Certainly.
Speaker 7: Speaker Johnson went to the Senate yesterday and begged them
Speaker 7: to keep it as close to the House version as possible,
Speaker 7: and I'm sure that fell on deaf ears. The thing
Speaker 7: you got to understand is that the Senate is the
Speaker 7: House is a kind of a very majoritarian sort of body.
Speaker 7: The Senate is much more collaborative. Think of these folks
Speaker 7: since they only need Republican votes. Think of those fifty
Speaker 7: three CEOs all negotiating with each other. That's what you're
Speaker 7: going to get. You're going to see a very different
Speaker 7: Senate bill. It's going to take weeks, and at the
Speaker 7: end of that process, I think what you see is,
Speaker 7: in capital pill parlance, you see the Senate trying to
Speaker 7: jam the House. In other words, the Senate will do
Speaker 7: its bill, say take it or leave it, and then
Speaker 7: what's going to happen is the House is going to
Speaker 7: have to be herded again in order to in order
Speaker 7: to make this happen more on the Senate's terms than
Speaker 7: the House. That's really where Trump comes in right at
Speaker 7: the end.
Speaker 6: So what happens on the Senate terms when it comes
Speaker 6: to salt, medicaid, and the clean energy tax cuts, I.
Speaker 7: Think I imagine that salt will be will still be
Speaker 7: fairly generous. I imagine Medicaid gets softened at the edges.
Speaker 7: You know, they're hardening up work requirements and some other
Speaker 7: things in order to get House conservative votes. On Medicaid,
Speaker 7: I imagine that gets softened again. And on green energy,
Speaker 7: I imagine again it probably gets extend that a little bit.
Speaker 7: The net effect of all three of those, frankly is,
Speaker 7: are things that are politically more palatable but may have
Speaker 7: the effect of, you know, nudging around the debt and
Speaker 7: deficit problem even further.
Speaker 6: And you think this can get done by July fourth.
Speaker 7: How I think it's certainly possible. Firstly, you need you
Speaker 7: need a political imperative, which is a fancy way of
Speaker 7: saying that you need you need Trump the executive branch
Speaker 7: to kind of light a fire under the Senate, not
Speaker 7: let the momentum that's been built up by the House dissipate. Uh. Secondly,
Speaker 7: you need that that to happen in the lead in
Speaker 7: the Senate leadership as well, and I think it probably
Speaker 7: does h Thirdly, Uh, you know now that the now
Speaker 7: that the Senate's got a template from which to work,
Speaker 7: what you will see is you will see senators the
Speaker 7: law stripes on the Republican side, the only side that
Speaker 7: matters in this unique process, coming out and actually you know,
Speaker 7: giving their own red lines. So you begin to assemble
Speaker 7: a coalition of fifty three Republican senatorslike not unlike the
Speaker 7: herding that you've seen in the House.
Speaker 6: Terry, if this doesn't get done, what kind of tax
Speaker 6: increases could we see going into next year?
Speaker 7: Well, if it doesn't get done, then you've got your bumper.
Speaker 7: You got Trump on the bumper. They're saying, you're going
Speaker 7: to have a you know, essentially a snapback to pre
Speaker 7: seventeen tax law. So that's a you know, for people
Speaker 7: that are used to the current situation, that's a huge increase.
Speaker 7: I have sixty eight percent in my head because that's
Speaker 7: what the President said. It may not be exactly that,
Speaker 7: but it'd be something something fairly large. So, you know,
Speaker 7: the kind of the looming economic undertow here is worth
Speaker 7: remembering as well, and that creates its own its own
Speaker 7: sort of urgency. The other thing about the July fourth
Speaker 7: deadline that I want to make is there are basically
Speaker 7: three kinds of things coming together. It's not just the
Speaker 7: tax bill. It's also that reciprocal tariffs are being studied
Speaker 7: and there will be a report out on that, and
Speaker 7: I would look at that as a as a deadline
Speaker 7: for a lot of these trade deals that are being
Speaker 7: negotiated as well. So you have the opportunity to either
Speaker 7: have a substantial lift coming out of Washington economically or
Speaker 7: you know, or substantial downturn either way, frankly politically.
Speaker 4: Terry.
Speaker 6: The bond market this morning, on the long end, we
Speaker 6: do see yields once again higher. You know, interest on
Speaker 6: the debt is currently the fastest growing part of the
Speaker 6: US budget. If they get this deal done, how are
Speaker 6: they going to deal with the deficit after this?
Speaker 7: Well, they're not going to deal with it in this bill,
Speaker 7: as you know. And there's an expectation by some who
Speaker 7: who who don't understand the process, and people shouldn't necessarily
Speaker 7: but that you know, this bill will wrap up all problems,
Speaker 7: that will be the end of it, and that's not
Speaker 7: the case. I think what you'll hear going forward is
Speaker 7: a lot more from Secretary Besson's about his three three
Speaker 7: three idea, the idea that now what we're going to
Speaker 7: do is we've dealt with the taxes, we've dealt with manufacturing,
Speaker 7: we're dealing with trade in a separate track. Now we're
Speaker 7: going to turn our attention to spending discipline. So what
Speaker 7: you're going to see in the first instance, I think
Speaker 7: is you're going to see huge fights, months long fights, frankly,
Speaker 7: over spending in the fall, not just because Republicans want
Speaker 7: to show some fiscal discipline, but because Democrats also want
Speaker 7: to resist a lot of the things that Republicans want
Speaker 7: to prioritize on spending discipline. And then and they look
Speaker 7: at that opportunity for spending in the fall as a
Speaker 7: means of revivifying their brand, frankly, which is not in
Speaker 7: a good place.
Speaker 6: Terry, thanks so much for your insight this morning, Jonathan
Speaker 6: Terry Haynes. There, of course, of penjia policy.
Speaker 2: So here's the like sis this morning. Policy uncertainty leaving
Speaker 2: FED officials in wait and see mode. They form a
Speaker 2: New York Fed President Bill Dudley with this to say,
Speaker 2: the Feed should prepare markets for the unexpected to an
Speaker 2: unusual extent. The world's most powerful central bank leaves the
Speaker 2: public in the dark. It can and should do better,
Speaker 2: build joint Just now for more, Bill, Let's take it
Speaker 2: to the top from the top and welcome to the program.
Speaker 3: Sir.
Speaker 2: What is the importance of a central bank articulating conveying
Speaker 2: its reaction function? And where do you think the SEP
Speaker 2: falls short at the moment?
Speaker 5: The advantage of conveying your reaction functions the markets can
Speaker 5: anticipate in real time as the economic outlook changes, what
Speaker 5: the Fed is going to do in the future, and
Speaker 5: that actually actually speeds up the transmission of mandory policy
Speaker 5: to the real economy.
Speaker 1: So the markets know how the FIT.
Speaker 5: Is going to adjust, market prices adjust immediately, and so
Speaker 5: that makes the FEDS response communicated to the market, to
Speaker 5: the comomy more quickly.
Speaker 1: So that's a really good thing right now.
Speaker 5: The Summary of Economic Projection is very much focused on
Speaker 5: the moral forecasts of the nineteen fom C participants, and
Speaker 5: so it doesn't really tell you much at all about
Speaker 5: what the FED would do if the tariff impact turns
Speaker 5: out to be larger on inflation or it turns out
Speaker 5: to be larger on growth. How will the FED pivot?
Speaker 5: How much will they cut rates? And this is why
Speaker 5: a lot of central banks around the world publish staff
Speaker 5: forecasts with scenarios or publish committee forecasts with scenarios, which
Speaker 5: basically the scenarios give you some sense of what the
Speaker 5: central bank will do if things turn out differently than expected.
Speaker 5: Last week, Bernanki gave a presentation at the Federal Reserve
Speaker 5: of the second annual Thomas Lawback Research Conference.
Speaker 1: He basically outlined why the FED needs to do this.
Speaker 1: The FED is basically an outlier.
Speaker 5: Every other central bank does this in one form or
Speaker 5: another that are peers of the FED, and this would
Speaker 5: actually help the FED to both communicate and also pivot
Speaker 5: when things turn out to be different than they expected.
Speaker 5: If you had that scenario in say twenty twenty one
Speaker 5: twenty two, the inflation might stay.
Speaker 1: Higher for longer.
Speaker 5: That probably made it easier for the Fed to terminate
Speaker 5: skill as a purchase program earlier.
Speaker 2: Well, isn't this something that effective communication in the news
Speaker 2: conference could address?
Speaker 5: Well, I think the problem with the news conference is
Speaker 5: the questions are very much focused on the Central Forecast
Speaker 5: and the Summary of Economic Projections and the DOC lot,
Speaker 5: So we don't we don't we don't get into a
Speaker 5: lot of detailed analysis of what if.
Speaker 3: Uh.
Speaker 1: You know, when Paul is asked.
Speaker 5: Questions about what would you do if this happens, he
Speaker 5: usually says it's data dependent. We'll see if you have
Speaker 5: if you actually sketched out alternative scenarios. That gives you
Speaker 5: a little bit more meat on the bone to sort
Speaker 5: of see how the federalis would react if things are turned.
Speaker 1: Out differently and expected.
Speaker 5: Federalies have already does this as part of the staff
Speaker 5: forecasts that are given to the Federal over Market Committee presumers.
Speaker 5: They do what are called alt sims, which basically our
Speaker 5: simulations of.
Speaker 1: If the world turns out to be different. So this
Speaker 1: is not like it's not being done internally already at
Speaker 1: the FED.
Speaker 5: Just I think sharing a little bit more of this
Speaker 5: information with the public would be very helpful.
Speaker 4: Well, Bill, there is one argument that part of the
Speaker 4: reason market participants concentrate so much on that median outlook
Speaker 4: is because it is anonymous that what we get in
Speaker 4: the SEP, we don't know what each individual member thinks,
Speaker 4: so it forces us to coalesce around that media. Should
Speaker 4: there and could there be a scenario where we do
Speaker 4: know what each individual member thinks, that it is no
Speaker 4: longer an anonymous survey put out to the public.
Speaker 5: Well, another shortcoming of the Summary of Economic productions is
Speaker 5: you can't connect the interest rate dot back to the
Speaker 5: forecast that that person made for unemployment, inflation, and growth,
Speaker 5: so you can't really discern an individual's person's reaction function.
Speaker 5: There have been proposals been made from time to time
Speaker 5: that let's actually publish what each person's forecast is so
Speaker 5: you can actually sort of see that reaction function.
Speaker 1: I think that would be an improvement over what we
Speaker 1: have today.
Speaker 5: But of course then people are going to be trying
Speaker 5: to figure out which dot is the chairman's dot. And
Speaker 5: I think, you know, communicating broadly to financial markets, to
Speaker 5: people are less Fed watchers than me or you. I'm
Speaker 5: not sure that connecting the dots really allows you to
Speaker 5: provide that wants.
Speaker 1: But what will the FED do if things turn out
Speaker 1: differently than expected.
Speaker 4: It does seem like we're an environment though, where Chair
Speaker 4: Powell has been trying his hardest not to make news,
Speaker 4: and part of that bill seems akin to what's happening
Speaker 4: in politics, that President Trump is more likely to say
Speaker 4: something about where the path they're going and his displeasure
Speaker 4: for it. What changes if we do get something to
Speaker 4: what you're proposing, where you get more scenarios, is there
Speaker 4: increased political pressure? Is that a risk that the FED
Speaker 4: should think about?
Speaker 5: Well, I think the political pressure of scenarios is that
Speaker 5: you're writing down things that might be not so good.
Speaker 5: So let's imagine that the FED wrote down a scenario
Speaker 5: where the terrorists are going to turn out to.
Speaker 1: Be higher for longer. That's going to feed more into inflation.
Speaker 5: Now I'm sure President Trump wouldn't like that, but still
Speaker 5: it's a possibility in terms of the economic outlook, and
Speaker 5: the FED really does need to think about things beyond
Speaker 5: the central forecast.
Speaker 2: Can we just wrap it up with something you've touched
Speaker 2: on a few times. Bill, If the dual mandate is
Speaker 2: in conflict at the end of the year, which side
Speaker 2: of the mandate do you think they should prioritize.
Speaker 5: I think it's really difficult to say at this point
Speaker 5: because it depends on what the risks are of making
Speaker 5: a mistake. So let's imagine that you decided, oh, I'm
Speaker 5: really more worried about the growth side, and then as
Speaker 5: a consequence of that, inflation expectations became unanchored. Then you'd
Speaker 5: have a real mess in your hand. You'd be back
Speaker 5: in the nineteen seventies, not a great place to be.
Speaker 5: So I think it's really not just about which factor
Speaker 5: is more off target, but also what are the risks
Speaker 5: of being wrong? And I think why the FED is
Speaker 5: paused right now is because they don't want to be wrong.
Speaker 5: This is a very tricky situation where you don't know
Speaker 5: where the trade policy is going to land, you don't
Speaker 5: know the impact of trade policy the on growth and inflation,
Speaker 5: and you don't know how this is going to affect
Speaker 5: households and businesses in terms of their attitude.
Speaker 1: It's sort of future inflation. BO.
Speaker 2: I appreciate your input, As always said Bill, doupting that
Speaker 2: the former New York Fed President. What then you call them,
Speaker 2: I'm blimbag opinion. So let's heap back to Dallas, Texas
Speaker 2: and catch up with Lisa standing by with a special guest. Hey, Lisa,
Speaker 2: Hey John.
Speaker 4: Yeah.
Speaker 8: One thing that companies don't have is a luxury to
Speaker 8: wait and see, like so many Federal Reserve officials are
Speaker 8: saying that they have to do. I am here with
Speaker 8: someone who is pioneering the shift of investment banking into Dallas, Texas.
Speaker 8: It is Ossium Khalil, who is the head of investment
Speaker 8: banking Client Services at Goldman Sachs. And Goldman Sachs has
Speaker 8: been rapidly expanding in Dallas. It's going to have the
Speaker 8: second biggest office here behind New York. At a time
Speaker 8: when you've seen just a flood of corporations move their
Speaker 8: headquarters to Texas. It has been one of the biggest
Speaker 8: absorbers of new corporate headquarters since the pandemic. Why Texas,
Speaker 8: Why Dallas in particular?
Speaker 4: Awesome?
Speaker 9: Well, Lisa, thanks for having me. It's great to be here.
Speaker 9: I'd say a couple of things. I moved down here
Speaker 9: almost nine years ago at the firm's request, it was
Speaker 9: a little bit of a surprise as a lifelong New Yorker,
Speaker 9: happy surprise. It was a very happy surprise moving to
Speaker 9: Dallas in retrospect. So we relocated here because the firm
Speaker 9: head of view rightly that Dallas is an emerging city
Speaker 9: and that there is an up and coming business population here,
Speaker 9: that there was tons of market cap already located in
Speaker 9: the city, and that more and more companies were going
Speaker 9: to relocate to this region for a handful of reasons.
Speaker 9: One is the centricity of Dallas. It's in the middle
Speaker 9: of the country, so access to either coast is within
Speaker 9: two and a half hours. Number Two, the university pipeline
Speaker 9: here is incredible. You have SMUTCU, rice A and m UT, etc.
Speaker 9: There is just a never ending flow of new talent
Speaker 9: that's coming to the state through the context of universities
Speaker 9: and who are looking for jobs in Dallas.
Speaker 8: At this point, everyone's been talking about taxes and how
Speaker 8: there's certain states that are high tax states. There certain
Speaker 8: states that are low tax states. There's certain that are
Speaker 8: just lower cost. In general, New York City, as we
Speaker 8: all know from having raised children there can be particularly expensive.
Speaker 8: I'm just wondering how much that's really one of the
Speaker 8: biggest drivers for a lot of these corporations.
Speaker 9: I think it's a factor. I'm not sure it's necessarily
Speaker 9: the biggest driver of why people are relocating. Keep in mind,
Speaker 9: DFW Airport is one of the most incredible tools that
Speaker 9: Dallas has, meaning that if you run a global business,
Speaker 9: like a lot of the corporations that are based here do,
Speaker 9: you can access your customers all over the world with
Speaker 9: a direct flight on American Airlines or one of the
Speaker 9: other airlines in the city. It's pretty remarkable when you
Speaker 9: think about how accessible the world is from Dallas. There's
Speaker 9: plenty of space, the schools are good, the quality of
Speaker 9: life is very high, so there are lots of things
Speaker 9: to love about being here in Dallas as opposed to
Speaker 9: just the taxes. But there's no question it's a factor.
Speaker 9: I don't think it's the driving factor.
Speaker 8: I love that you're speaking to yourself from nine years ago. Awesome,
Speaker 8: and it's really all of these advantages true.
Speaker 2: Trust me.
Speaker 8: I am curious about Wall Street South, so a lot
Speaker 8: of people are Southwest. People have been talking about that
Speaker 8: there's a new exchange that's going to be coming out.
Speaker 8: We've seen a twenty seven percent increase in investment, banking,
Speaker 8: and services staff in this city since the pandemic. How
Speaker 8: much is this really going to be It's kind of
Speaker 8: the Wall Street Southwest. How much do you really feel
Speaker 8: that gravitational force?
Speaker 9: So I think this enormous momentum. So I can speak
Speaker 9: for Golden Sachs. We're building a campus right here in
Speaker 9: the heart of the city, which is really important for
Speaker 9: us to be in Dallas proper. So a lot of
Speaker 9: the corporations that have moved here have moved to some
Speaker 9: of out the outlying cities around Dallas, so Plano, Frisco, McKinney,
Speaker 9: these are about twenty thirty minutes outside of Dallas. It
Speaker 9: was really important for Goldman Sachs as an urban firm,
Speaker 9: to have our presence in the heart of the city.
Speaker 9: So we're building our campus here. We have forty five
Speaker 9: hundred people in the city already. When I got here,
Speaker 9: we had less than nine hundred and nine years ago,
Speaker 9: so the growth has been incredible and that's only going
Speaker 9: to continue to happen. A lot of our competitors, I've
Speaker 9: also established a presence in the city. So you have
Speaker 9: people in Plano. There are folks that are in and
Speaker 9: around kind of Wall Street South as you reference. But
Speaker 9: I don't see any slow down. It's too good of
Speaker 9: a place to live and to work and to be
Speaker 9: quite frankly, to not have that kind of growth.
Speaker 8: What thing I'm struck by is that when I talk
Speaker 8: to corporations in different cities, it seems like they have
Speaker 8: a very different view on where the economy's at, on
Speaker 8: kind of how ambitious to be with expansion plans, and
Speaker 8: as we were saying, they don't have a luxury of
Speaker 8: weight and sea like the Federal Reserve does. What are
Speaker 8: you hearing in terms of just how much people are
Speaker 8: putting on hold their mergers or acquisitions, their capital investment plans.
Speaker 9: So I'll give you a Texas perspective, and then I'll
Speaker 9: give you more of a national and global one. Texas
Speaker 9: respective is still one of optimisms. Generally speaking, this is
Speaker 9: a state that's had incredible economic growth and will continue
Speaker 9: to be one of the handful of states that grow
Speaker 9: in the country. So that's great for Texas. When we
Speaker 9: talk to CEOs and corporations in around the state and
Speaker 9: in and around the country, people are cautiously optimistic. Right
Speaker 9: People want to grow, They want to continue to drive
Speaker 9: their businesses to create value over the long term. But
Speaker 9: of course there's some caution given the geopolitical environment, given
Speaker 9: the backdrop, But generally speaking, companies are still making decisions
Speaker 9: that are going to allow them to grow over the
Speaker 9: course of the next several years. So if you look
Speaker 9: at the M and A environment, it's well, again i'd
Speaker 9: phrase it is cautiously optimistic. Deals are still Happeningactions, transactions
Speaker 9: are still being announced. So I'm actually large transactions have
Speaker 9: been announced in the last couple of weeks. But if
Speaker 9: you look at the middle market that call it two
Speaker 9: to five billion dollar range, there's been a tremendous amount
Speaker 9: of activity, double digit growth year over year.
Speaker 8: Which really highlights how there's sort of a disparity between
Speaker 8: Smovori hearing out of the likes of say Target this
Speaker 8: morning came out and talked about how consumers are really
Speaker 8: pulling back and they're getting much more cautious, and then
Speaker 8: you see other companies that are still expanding that don't
Speaker 8: can't wait and see and are optimistic. Is there a
Speaker 8: sense the US economy is just driving that forward? And
Speaker 8: I ask you this not just as the head of
Speaker 8: investment banking client services Goldmen Sacks, but also as someone
Speaker 8: who sits on the corporate Advisory Board at the Dallas
Speaker 8: FED and is very involved in all of these kinds
Speaker 8: of conversations.
Speaker 9: Yeah, So again, I think that there is a view
Speaker 9: that the US is still the best place to be
Speaker 9: right and that they're going to the winds of change.
Speaker 9: You're going to continue to shift back and forth. But still,
Speaker 9: if you think about our economy, you think about what
Speaker 9: the US has to offer, so to speak, particularly relative
Speaker 9: to the rest of the world, this is still where
Speaker 9: companies want to be and where companies want to operate.
Speaker 9: There's no question there's concern about the state of the consumer.
Speaker 9: There's no question there is concern about the forward for
Speaker 9: the economy. Treasury auction as we were talking about earlier,
Speaker 9: that comes into focus.
Speaker 8: Right, John.
Speaker 9: So there's a lot of things that are out there,
Speaker 9: but again this cautious optimism that we will work our
Speaker 9: way through. The fundamentals, of course are quite sound, will
Speaker 9: work our way through some of the noise that's in
Speaker 9: the markets today, and that over the long term. If
Speaker 9: you're running a business and I've got a view that
Speaker 9: this is the right thing for your company, You're going
Speaker 9: to go ahead and execute on that strategy if it's
Speaker 9: available aually the way, I'm sorry to say, financing markets
Speaker 9: are wide open, so companies are not having as difficult
Speaker 9: at time accessing capital to continue to grow.
Speaker 8: I just want to finish up. A lot of people
Speaker 8: have said that Miami is the new Wall Street South,
Speaker 8: Dallas is the new Wall Street Southwest, that New York's
Speaker 8: getting a lot of competition. Do you think that the
Speaker 8: Dallas office could ever be bigger than New York's office
Speaker 8: for Goldman Sachs, or that this presence could really rival
Speaker 8: it in a more material way.
Speaker 9: Well, I would never say never, but I will say
Speaker 9: certainly that our headquarters are in New York. Goldman Sacks
Speaker 9: will always be a New York based firm. But could
Speaker 9: Dallas continue to grow in size? Of course, we're going
Speaker 9: to continue to grow, right That momentum is there and
Speaker 9: that's not going to change. Could be one day be
Speaker 9: bigger than New York, It's certainly possible. We actually have
Speaker 9: Our presence in India is larger than it is in
Speaker 9: New York. Just give it again the size and the
Speaker 9: scope of the firm. But we're quite proud of what
Speaker 9: we've been able to build in Dallas. I think the
Speaker 9: forwards very bright, so would expect more growth here, but
Speaker 9: we don't mistake it. We are a New York based
Speaker 9: firm and Dallas is going to continue to be a
Speaker 9: very important part of the Golden Sacks system.
Speaker 8: Spoken like someone from New York City heading to Dallas
Speaker 8: who has settled here with his family. Awesome, Khalil, thank
Speaker 8: you so much for being with us. Really wonderful to
Speaker 8: speak with you. That was awesome, Khalil of Gordman Sachs,
Speaker 8: head of their own person banking client services and the
Speaker 8: office here in Dallas at Texas, John, I just want
Speaker 8: to thank you again for talking about that twenty year auction.
Speaker 8: I do think it's going to be very important and
Speaker 8: potentially the risk event.
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