Speaker 1: This is the Bloomberg Surveillance Podcast. I'm Lisa A.
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Speaker 3: We're waiting for the PC data. We're joined by Mike
Speaker 3: Nicky Aron the Deak. So we're waiting for the personal spending,
Speaker 3: the deflator. Mike, will it be disinflationary? Roll of the dice,
Speaker 3: that's the question. We're waiting for the numbers to come
Speaker 3: down on the Bloomberg Terminal.
Speaker 4: Well, I got about four seconds until that happens. But
Speaker 4: the ideas we may get a little more disinflation. Let's
Speaker 4: find out from the Bureau of Economic Analysis, and here
Speaker 4: come the numbers. And we'll start with the inflation numbers.
Speaker 4: They come in hotter than anticipated, up four tenths of
Speaker 4: a percent. I don't know month over a month basis.
Speaker 4: For the headline, the core comes in up a three
Speaker 4: tenths which is about what was expected, although there was
Speaker 4: some leaning towards maybe a little lower number year over year.
Speaker 4: Now we see the PCE headline number at three point
Speaker 4: four percent, that's down from three to five, and the
Speaker 4: core comes in at three seven, down from three to nine.
Speaker 4: Both of those expected. All the people who like to
Speaker 4: dive into all those numbers and figure out what actually
Speaker 4: changed will be with us in a few seconds. Personal
Speaker 4: income up three tenths. That's lower than the prior month
Speaker 4: of four tenths gain, but also lower than what was
Speaker 4: anticipated a four tenths gain. Spending up seven tenths, I
Speaker 4: mean not strong.
Speaker 5: On the back of that, on the back of that
Speaker 5: GDP and the connginut.
Speaker 4: Well, this number is in the GDP because this is
Speaker 4: a September number. It was the third month of the quarter,
Speaker 4: so he kind of sort of backed out the numbers
Speaker 4: and anticipated that this would be fairly strong. We were
Speaker 4: up four tenths the prior month. The question is now
Speaker 4: do we continue to see that spending happen, Because if
Speaker 4: incomes are falling behind and they have been the spending
Speaker 4: levels over the last couple of months, that would suggest
Speaker 4: that maybe there's a pullback ahead. Now I'm not the
Speaker 4: expert here.
Speaker 3: There's one more there is, indeed, La Rain chief economists
Speaker 3: out with us this morning.
Speaker 6: First take, I think that we continue to see inflation
Speaker 6: coming down, but it's still uncomfortably It's still unacceptably high
Speaker 6: from the point of view of the Fed, and I
Speaker 6: think the conversation as we go into next year continues
Speaker 6: to the options for the Fed continue to narrow because
Speaker 6: if inflation stays about where it is and it's going
Speaker 6: to take a long time for it to get closer
Speaker 6: to too, their room to maneuver should the economy.
Speaker 1: Slow at all, is going to be very narrow.
Speaker 6: And look by these numbers, it looks like the economy
Speaker 6: is just still incredibly strong. We know that from the
Speaker 6: GDP numbers that we already got, but I mean the
Speaker 6: spending has just by the households that has defied every
Speaker 6: expectation of it to slow, and it's accelerated so much
Speaker 6: in the third quarter.
Speaker 1: That's what's extraordinary.
Speaker 4: I think savings rate comes in a three point four percent.
Speaker 4: People have been watching that for some indication of whether
Speaker 4: or not they're going to run out of money in
Speaker 4: the American consumer. It's down from four percent and it's
Speaker 4: been a steady decline. But historically, before the pandemic, we
Speaker 4: used to say people spend what they make. They don't
Speaker 4: dip into savings the way people tend to think they do.
Speaker 4: And so if that's the case, then there's more of
Speaker 4: a case now for maybe a slow down. People don't
Speaker 4: have as much to dip into if they wanted to,
Speaker 4: but they're also not making as much as they were.
Speaker 3: Well, I had johnat Henry with me this morning from
Speaker 3: HSBC and she said, actually Americans are more likely to
Speaker 3: dip into their savings and spend, spend, spend right to
Speaker 3: the very end.
Speaker 5: But I want to bring you an idea.
Speaker 3: From UBS, which is Paul Donovan, where he said, you know,
Speaker 3: when we go to write the history of twenty twenties,
Speaker 3: do not bet against the headonism of the US consumer.
Speaker 5: It's very rich. I love it.
Speaker 3: I mean, there's a there's a brilliant wine place in
Speaker 3: London called Hedonism Wines.
Speaker 5: Whole other story the hedonism. You can tell us that later.
Speaker 5: I could tell you.
Speaker 3: That later, but I want to understand from you laya
Speaker 3: the hedonism of the US consumer. Is that real or
Speaker 3: do you think that runs out of mileage as well.
Speaker 6: Next sure, listen, he's got a point. That's a really
Speaker 6: colorful way to put it. But that's what the third
Speaker 6: quarter felt like. Between the headlines about the concerts, Yeah,
Speaker 6: all of that, and then and all everyone who followed.
Speaker 6: I think, you know, people seem to be looking for
Speaker 6: that next experience and looking to pay whatever is required
Speaker 6: to get it. You know, this issue of savings has
Speaker 6: gotten so complicated because we of course have the excess
Speaker 6: savings that accumulated during the shutdown. Is that more you know,
Speaker 6: bucketed with these you know sort of now the highest
Speaker 6: quintile of quartile of household that sort of maybe aren't
Speaker 6: going to spend them as much. We know that that
Speaker 6: access savings is run out for a lot of the
Speaker 6: lower you know sort of strata.
Speaker 7: The other seventy.
Speaker 6: Five percent of us, we're not in that upper quintal.
Speaker 6: I think as we think about it, people, the normal people,
Speaker 6: I think, and yet you know, we just see the
Speaker 6: strong job growth I think reinforces the foundation of the household,
Speaker 6: and we just see this reacceleration is really unexpected in.
Speaker 4: Terms of your hedonism. Example, here services spending went up
Speaker 4: eight tenths whereas goods spending went up seven tents. There
Speaker 4: was always a story about people switching away from goods,
Speaker 4: but they still seem to be spending a lot on goods.
Speaker 4: Services don't go into the retail sales numbers that we
Speaker 4: got earlier this month, except for bars and drinking places
Speaker 4: fitting your theme, but eight tenths of a percent to
Speaker 4: gain for services pretty strong. So it looks like people
Speaker 4: were spending money during the third quarter on all sorts
Speaker 4: of things.
Speaker 6: I do think there's an interesting dynamic here, which is
Speaker 6: that if you look at consumer confidence, it's still well
Speaker 6: below where it was before the pandemic, and that's, you know,
Speaker 6: despite strong growth.
Speaker 5: So can you tie those two together.
Speaker 3: You know that the consumer confidence is being a little
Speaker 3: bit battered, but the spending it remains unabated.
Speaker 6: To me, it really, I think inflation is something that
Speaker 6: is still really casting a long shadow over the household,
Speaker 6: because you know, when I'm not here, I'm the mom
Speaker 6: at the grocery store and I've got one bag of
Speaker 6: groceries and it still cost me ninety five dollars and
Speaker 6: I can't figure out what's in it, you know, So
Speaker 6: I think you know this idea that your over year
Speaker 6: inflation is coming down, but the sticker shock is still
Speaker 6: a very real and present pain point to household budgets.
Speaker 3: And Coca Cola are raising prices, and Netflix are raising prices,
Speaker 3: and there are a Whole and Apple TV they're raising
Speaker 3: prices as well, and we are moderately immune to those.
Speaker 5: Do you know that you'll still order a Coca Cola?
Speaker 5: You'll still order You'll still order your Netflix movie.
Speaker 4: Mike Well, I was looking here to see if we
Speaker 4: get super Core. I haven't got that number pulled out yet,
Speaker 4: but that's the one that the Chairman of the Fed
Speaker 4: says he likes the most. See if we have that
Speaker 4: number calculated yet, because you got to take out.
Speaker 6: And then the CPI number that had risen the most
Speaker 6: since you know, about a year, so it had. I
Speaker 6: think that's going to be a key piece of today's
Speaker 6: report too.
Speaker 3: Well, just looking at the bond market, it's virtually flat.
Speaker 3: I mean four eighty five is where we are on
Speaker 3: tenure government bonds. So there's a sort of a flat,
Speaker 3: sort of unknown entity within the bond market. Let's just
Speaker 3: check in on equities up for tenenths of one percent again,
Speaker 3: you've got an Amazon recovery and nice kicker there. It
Speaker 3: was up six percent at one juncture, giving a little
Speaker 3: bit back. You're looking at ten year years, just still
Speaker 3: incrementally rising. This morning at four eighty five, we just
Speaker 3: had Bmo in Lingen here with us saying look, the
Speaker 3: next three weeks will define where the endpoint is for
Speaker 3: the bond spike. Use oil is up one point ninety
Speaker 3: three percent this morning. Again there's more geopolitical anks with
Speaker 3: military action in Syria from the US side, and that
Speaker 3: has brought again a geopolitical bid back to the oil markets.
Speaker 3: But personal income rises zero point three percent. The estimate
Speaker 3: was for plus point four percent, So Mike this the
Speaker 3: takeaway from this is the core price index rises to
Speaker 3: three point seven percent, pretty much in line with the estimates.
Speaker 4: We're seeing disinflation, I mean O creative inflation is slowing down.
Speaker 4: It's not slowing down as perhaps fast as people would like.
Speaker 4: And to Lar's point, especially about the being the moment
Speaker 4: at the grocery store, prices go up at a slower rate,
Speaker 4: but they don't come down. So you're paying more for
Speaker 4: a lot of staples and they're going to just stay
Speaker 4: at that price. And so people look at that and
Speaker 4: they're still experiencing inflation, even if inflation is not as
Speaker 4: bad as it was before.
Speaker 3: What what happens then to this view in the market
Speaker 3: that we're going to get right cuts into twenty twenty
Speaker 3: four does not debate change.
Speaker 6: It's got to continue. The FED, I think now has
Speaker 6: to just continue to ring rate cut expectations out of
Speaker 6: that future's curve. I feel like this is the deal
Speaker 6: with the devil right now, because if you had told
Speaker 6: me that we were going to have GDP growth of
Speaker 6: almost five percent and the FED was not going to
Speaker 6: cut rates again, I would have just not believed that
Speaker 6: was a possible outcome. But FED future's markets are not
Speaker 6: pricing in another rate cut. Markets seem very convinced the
Speaker 6: Fed is done. And I think the only way that
Speaker 6: works is if we continue to get this drift higher
Speaker 6: in long term yields. And there's a room for that
Speaker 6: because today markets have seventy five basis points of rate
Speaker 6: cuts priced in for next year, So if the FED
Speaker 6: is going to kind of stay on hold, there's room
Speaker 6: for that to continue to come out, for long term
Speaker 6: rates to continue to move higher.
Speaker 5: How do you think they look at this in the Fed?
Speaker 3: In the Fed might give you look at this the
Speaker 3: top line is pce is it a four month high
Speaker 3: consumer spending picks up. It doesn't leave them that huge
Speaker 3: optionality to be very very dubbish, does it.
Speaker 4: They can just sit on this at the moment because
Speaker 4: they forecast in September, the last time they did forecast
Speaker 4: that we would see PCEE core at three point seven
Speaker 4: percent at the end of the year. Well, I'm with
Speaker 4: there bang on where we are. So most economists think
Speaker 4: with a couple of months to go, we're going to
Speaker 4: come in below that. So the Fed could argue its
Speaker 4: targets are being hit. And you mentioned Ian Ling, and
Speaker 4: he had a great note this morning about how we're
Speaker 4: starting to see more impacts from higher FED rates and
Speaker 4: that is slowly getting into the economy and we should
Speaker 4: see more. So the Fed is probably going to sit
Speaker 4: there and say what we're doing is working. We're at
Speaker 4: a level where inflation is still coming down. We don't
Speaker 4: have to go up more right now with all this
Speaker 4: uncertainty out there about what's going to happen.
Speaker 6: Well, and unless inflation is a nine percent there really
Speaker 6: is no emergency reason to raise rates. That's usually you know,
Speaker 6: not a thing. So they you know, to your point,
Speaker 6: they have the time and yet. To me, this increase
Speaker 6: in long term interest rates is the reason that they
Speaker 6: can be patient, and that is going to continue to
Speaker 6: sort of pump the brakes on activity. You know, when
Speaker 6: I look ahead at next year, my forecast is for
Speaker 6: slower growth. I think these higher interest rates have actually
Speaker 6: increased the chance of a recession, not decreased.
Speaker 5: Is that slower growth? No landing, soft landing, not hard landing.
Speaker 6: I think it has to be as soft landing. I
Speaker 6: still feel like there is very real risk of recession
Speaker 6: next year, and we cannot discount that. But all the
Speaker 6: reasons why we've been saying it might be a mild
Speaker 6: recession could also mean that you just end up with
Speaker 6: some sluggish growth.
Speaker 3: So, Mike, as we go to the close of the year,
Speaker 3: what's the next piece that you're going to hang your
Speaker 3: hat on in terms of dead We've got Michigan at
Speaker 3: University of Michigan.
Speaker 4: Yeah, I don't think that's going to move the needle
Speaker 4: a whole lot. But I think what we are going
Speaker 4: to focus on is all the data next week, particularly
Speaker 4: the ISM numbers and then jobs at the end of
Speaker 4: the week. The Fed meets on Wednesday, so they won't
Speaker 4: have the jobs figures, but at this point to get
Speaker 4: an idea of where they're going to go, and nobody
Speaker 4: is less than a two percent chance they do anything
Speaker 4: on Wednesday, but nobody expects that. But the question is
Speaker 4: then what happens January December, January, and the jobs report
Speaker 4: will contribute to that. That's what will.
Speaker 2: Be joining us is Isaac Boltanski, director of policy research
Speaker 2: at BTIG. Can you give us a sense, to Isaac,
Speaker 2: of just what kind of leader Mike Johnson is going
Speaker 2: to be? Can he find some sort of consensus within
Speaker 2: a very fractured party.
Speaker 7: I think the simple answer to that is now. I
Speaker 7: think I think that there are lots of folks who
Speaker 7: are breathing this deep sigh of relief because now there's
Speaker 7: someone with a gavel and we can begin handling the
Speaker 7: people's business again. But when you take a step back,
Speaker 7: you've got to see that the House Republican caucus is
Speaker 7: still deeply fractured. It's not clear how well they're going
Speaker 7: to be able to govern going forward. There's no semblance
Speaker 7: of bipartisanship anywhere on Capitol Hill, and frankly, Lisa I
Speaker 7: think that people are downplaying the risk associated with a
Speaker 7: prolonged government shutdown. I still think that is distinctly possible
Speaker 7: because we are nowhere, and I mean this nowhere when
Speaker 7: it comes to figuring out a way to fund the
Speaker 7: government and deal with all the supplemental funding requests that
Speaker 7: have been sent from the White House.
Speaker 2: There's a lot to impact there, and a lot of
Speaker 2: people have pushed backed against that and said that actually,
Speaker 2: the fact that we have a speaker makes it less
Speaker 2: likely that we will have a government shutdown. Are you
Speaker 2: disagreeing with that? Are you saying that basically this is
Speaker 2: just a window dressing over a pretty big fracture fissure
Speaker 2: in the Congress.
Speaker 7: In Congress, though, the unknown right now is how much
Speaker 7: of a honeymoon speaker the new speaker is going to get.
Speaker 7: But my sense when you start to look at some
Speaker 7: of the specific issues here and really hone in on
Speaker 7: things like Ukraine funded, or you take a step back
Speaker 7: and you look at the fact that we haven't even
Speaker 7: agreed on overall spending levels, I think it's incredibly difficult
Speaker 7: to believe that that this group is going to be
Speaker 7: able to easily avert a shutdown. My base case is
Speaker 7: that we are going to see a shutdown later this year.
Speaker 7: I don't think that's going to be a massive market
Speaker 7: moving event, but I do think that the getting the
Speaker 7: gabble to Speaker Johnson has lessened fears in the market,
Speaker 7: and that that's unfounded at this point.
Speaker 3: So the President wants a total of what one hundred
Speaker 3: and sixty two billion dollars from Congress across Ukraine, Israel,
Speaker 3: supplemental spending, et cetera. How contentious is this going to be?
Speaker 3: How much of a flashpoint is this going to be?
Speaker 3: Will it all be cojoin? Will it just be a
Speaker 3: great dissipation of this request.
Speaker 7: So first and foremost, they haven't even agreed on basic
Speaker 7: funding levels yet, right, so we're not even at a
Speaker 7: point of agreement over the normal funding levels, and that's
Speaker 7: going to be the fight for the next few weeks
Speaker 7: when we then dig into the supplementals, where you do
Speaker 7: have over one hundred billion in different ass I think
Speaker 7: that there is clearly political support for things like funding
Speaker 7: Israel and supporting Israel and it's battle with Hamas. I
Speaker 7: think that fourteen billion dollars is very likely to get done.
Speaker 7: There's clearly support for more money at the US southern border.
Speaker 7: I think that that's bipartisan and by Camel on Ukraine,
Speaker 7: it's going to be a little bit tougher. And note
Speaker 7: that this is something that the News Speaker has actually
Speaker 7: fought against in the past. Last night he did suggest
Speaker 7: that there is a way to move forward on Ukraine funding,
Speaker 7: but that they're going to have to be conditions attached
Speaker 7: to that. No one knows what those conditions are yet.
Speaker 7: Put it all together, and I think that there is
Speaker 7: a way forward on this spending package. I just think
Speaker 7: that we're going to have to go through the same
Speaker 7: type of pain that we were seeing before when Speaker
Speaker 7: McCarthy lost the gap.
Speaker 3: How long do you think this speaker lasts or do
Speaker 3: you think he is there for the duration?
Speaker 7: So what of the first things he's going to have
Speaker 7: to do is try to get rid of that motion
Speaker 7: to vacate which pulled Kevin McCarthy out of the chair.
Speaker 7: I think that this speaker has a decent runway to
Speaker 7: get into first quarter of next year at a minimum.
Speaker 7: My conversation suggests that there's a real focus on at
Speaker 7: least getting to April of next year. As a reminder,
Speaker 7: that's when the one percent across the board. Budget cuts
Speaker 7: will go into effect if Congress does not pass the
Speaker 7: twelve appropriation spills. So I think that that's the date
Speaker 7: that a lot of people have circled on their calendar
Speaker 7: just trying to make it to that point.
Speaker 8: So, Isaac, how do you deal with the fact that
Speaker 8: you are in a situation where the interest that the
Speaker 8: government has to pay continues to go up? Where does
Speaker 8: that fall in these budgetary arguments? No one seems to
Speaker 8: talk about it, but it's on the rise. So if
Speaker 8: we can't cut the budget at all to do what
Speaker 8: we want to do, how are we dealing with spending
Speaker 8: that we now are compelled to do.
Speaker 7: That's one of the most frustrating parts of the past
Speaker 7: three weeks is that we weren't talking about the real issues.
Speaker 7: We weren't talking about the thirty three trillion in debt,
Speaker 7: we weren't talking about the two trillion deficit we're running
Speaker 7: this year. We weren't talking about the seven hundred billion
Speaker 7: dollars it costs US just this year to fund our deficits.
Speaker 7: And so I think that I remain deeply disheartened because
Speaker 7: we're not having those conversations, and more broadly, no one,
Speaker 7: no one, No one cares about the deficit when they're
Speaker 7: in the majority. They only care about the deficit when
Speaker 7: they're in the minority. And so until we see something
Speaker 7: that shocks DC tou to the point where it's forced
Speaker 7: to think about the debts and deficit differently, it's going
Speaker 7: to be status quo business as usual.
Speaker 8: How do you force someone to take a look at
Speaker 8: their own balance sheet and say, your payment next year
Speaker 8: is going to be double what your payment was this year,
Speaker 8: and you couldn't afford your payment this year.
Speaker 1: Why do we not?
Speaker 8: Why is that not part of the conversation. I know
Speaker 8: nobody wants to have it when they're in the majority.
Speaker 8: Nobody wants to not spend because everybody wants they get there,
Speaker 8: has a million things they want to spend on. But
Speaker 8: it's sort of like no one is dealing with the
Speaker 8: elephant in the room, no pun intended, which is the
Speaker 8: fact that we've got all this spending that still has
Speaker 8: to come through on this And I find that particularly
Speaker 8: frustrating in general. So I just how do we get
Speaker 8: to that conversation?
Speaker 7: You should run for office, come on down here and
Speaker 7: try to try to figure it out. But look, We're
Speaker 7: going to have a real, real fight over this with
Speaker 7: the Trump tax cuts expiring. You've got trillions of dollars
Speaker 7: in tax cuts that are coming due in twenty twenty
Speaker 7: five from the expiration of the Trump tax cuts, and
Speaker 7: I think that that could be a forcing mechanism for
Speaker 7: a broader conversation, but it's going to depend who's in power,
Speaker 7: right and sot. The next hurdle is to understand who's
Speaker 7: ahead in the elections.
Speaker 2: How much is Jennet Yellen's idea the mainstream that yields
Speaker 2: are going to go back down once we get past
Speaker 2: this blip, and that higher yields in the US is
Speaker 2: not a reflection of deficits but really just a reflection
Speaker 2: of how strong the US economy is. Is that the
Speaker 2: main idea and belief in Washington, DC.
Speaker 7: It's the hope of many on Capitol Hill. I don't
Speaker 7: think that there is anyone who has a firm feel
Speaker 7: for where yields are going, surely not on Capitol Hill.
Speaker 7: But it is definitely the hope at this point that
Speaker 7: everything will fix itself. Because our politics are so broken,
Speaker 7: they're unable to fix the problems, and so there is
Speaker 7: a hope that that's the direction that's going, Lisa. But
Speaker 7: I don't think anyone has a firm feeling one way
Speaker 7: or the other.
Speaker 2: Hope is not a strategy. I just keep thinking about that.
Speaker 2: Isaac Boltanski of BTIG, thank you so much for being
Speaker 2: with us. Joining us now is Lisa Shallatt CIO at
Speaker 2: Morgan Stanley Wealth Management, And Lisa, I just want to
Speaker 2: start with have we sold off enough? Because I know
Speaker 2: you've been bearished, particularly on tech. Has this been a
Speaker 2: big enough sell off for you?
Speaker 9: Look, we're not interested in getting in here unless you're
Speaker 9: a trader. What we, you know, tend to point our
Speaker 9: clients to is being investors, being long term investors. And
Speaker 9: you know, our perspective is going has been that we're
Speaker 9: going to continue to trade in this bear market range,
Speaker 9: which is where we've been for two years. I mean,
Speaker 9: people have to pull out their telescope and look at
Speaker 9: where we've been. You look at the s and P
Speaker 9: five hundred. We were here in the summer spring of
Speaker 9: twenty twenty one, and so you know, this is a
Speaker 9: trader's market right now. We don't think we break out
Speaker 9: of this range of somewhere around forty two forty five
Speaker 9: hundred really until the middle of next year, and that's
Speaker 9: when the fog clears on whether or not we're really
Speaker 9: going to see growth reaccelerate or we're going to see
Speaker 9: us you know, probabilities of recession increase. And we've been
Speaker 9: in the camp that we're going to be in that
Speaker 9: second scenario where next year economic growth, particularly in the
Speaker 9: second half, disappoints. I mean, look at the third quarter GDP,
Speaker 9: we're doing nominal eight percent. What kind of a cop
Speaker 9: year over year is that going to be in the
Speaker 9: second half next year.
Speaker 1: It's a great point.
Speaker 2: You said that this is a trader's market when it
Speaker 2: comes to equities. Is it also a trader's market when
Speaker 2: it comes to bonds. You've been bullish on longer term
Speaker 2: bonds at a time where there's a feeling that maybe
Speaker 2: this selloff has legs and actually is fundamentally driven, including
Speaker 2: by how much the US has to finance.
Speaker 5: Yeah.
Speaker 9: I mean, look, our perspective is that we are probably
Speaker 9: within fifty basis points of a peak in rates, and
Speaker 9: that having clients begin to embrace this market lock in
Speaker 9: some of these coupons with the potential for rates on
Speaker 9: a cyclical basis to reset, creates a double digit return
Speaker 9: with a third of the volatility. So again, as as
Speaker 9: as UH you know investors, we think that that the
Speaker 9: buy and hold on some of these bonds UH is
Speaker 9: a good value proposition. But I think here too, there's
Speaker 9: a lot of volatility, and that means you've got to
Speaker 9: be a trader if you're going to be uh, you know,
Speaker 9: in this market looking for returns on the month or
Speaker 9: on the quarter.
Speaker 3: Lisa, good morning, it's manas. I think that's one of
Speaker 3: the most honest interpretations. You're not prepared to step and
Speaker 3: buy into this market in a trading market that we've
Speaker 3: heard in quite a while. But there is the other side,
Speaker 3: which is you either view that you've got to build
Speaker 3: some kind of defense, and I'm drawn to your view
Speaker 3: that you want real assets and you want gold. Gold
Speaker 3: is nearly a two thousand dollars and so are you
Speaker 3: actively adding more real assets than if you're not convinced
Speaker 3: on pure equity.
Speaker 9: We are adding and encouraging folks to add some real
Speaker 9: assets here. I mean, one of our themes has been that,
Speaker 9: you know, the equity markets in particular are just not
Speaker 9: pricing real risk premiums. And you know, one of the
Speaker 9: things that has, you know, given us has been heartening
Speaker 9: to us is the fact not only are we getting
Speaker 9: higher real rates in the bond market, but that there's
Speaker 9: a term premium that suddenly people realize that in a
Speaker 9: new inflation and in a new interest rate regime where
Speaker 9: the FED is going to be data dependent, there is
Speaker 9: lumpiness and there is uncertainty over time about how that
Speaker 9: data is going to come out. Add in all the
Speaker 9: geopolitical dimensions to what's going on right now, the dimensions
Speaker 9: of dysfunction in Washington, d C. The fact we're rolling
Speaker 9: into an election year in the US where I think
Speaker 9: that the headlines and the developments are going to be
Speaker 9: extraordinarily volatile. Our view is that real assets, things like commodities,
Speaker 9: things like real estates, things like energy, infrastructure assets could really,
Speaker 9: you know, be a source of protection here in stability
Speaker 9: in portfolios.
Speaker 3: We just had in Lincoln here from BMO. We talked
Speaker 3: about a number of different things that could drive the
Speaker 3: bond market, term premium.
Speaker 5: Being one, fiscal deficit's being another.
Speaker 3: He thinks that the peak, the peak spike in rates
Speaker 3: could be over the next couple of weeks. Would you
Speaker 3: agree with that, and if so, what.
Speaker 5: Part of the bond market.
Speaker 3: Would you like to take a portion off or add
Speaker 3: to if you're adding real commodities, what would you add
Speaker 3: in duration?
Speaker 9: Yeah, we're we're looking at Our perspective is that the
Speaker 9: best value right now is really intermediate, somewhere between four
Speaker 9: to six. We're finding some value in sevens in the
Speaker 9: treasury market in fact, but we're looking at investment and
Speaker 9: great corporate, so you know, we're taking the treasury yield
Speaker 9: and taking some of that spread. We do believe that
Speaker 9: there are quality balance sheets out there that can service
Speaker 9: you know, these coupons. So we're we're enthusiastic that the
Speaker 9: middle of the curve could produce double digit returns over
Speaker 9: the next you know, twelve to eighteen months.
Speaker 6: Lisa, I'm curious about this really different reaction when it's
Speaker 6: come to this geopolitical these devastating geopolitical events. Normally we
Speaker 6: would see US yields plunge in the face of this,
Speaker 6: and we had that reaction. But you know, you blinked
Speaker 6: and you missed it. We're right back up again. Does
Speaker 6: that represent a more fundamental reassessment of treasuries as a
Speaker 6: risk free asset? You know, you were going into this
Speaker 6: government shutdown again, an episode which historically has given us
Speaker 6: lower yields, and we sort of shrug it off. Is
Speaker 6: this time going to be different because people are fundamentally
Speaker 6: reassessing the dollar as a flight to quality and the
Speaker 6: result treasures.
Speaker 9: Yeah, I mean, I love that you're bringing up this issue.
Speaker 9: I mean, this is one of the issues that we
Speaker 9: talk about with our clients all the time because it
Speaker 9: is our sense that something fundamental is going on and
Speaker 9: that the appetite for US treasury debt is different this time. Clearly,
Speaker 9: you know, the market is readjusting to not having the
Speaker 9: FED as a price and sensitive buyer, right, we know that,
Speaker 9: and and QT is certainly a weight here. But you know,
Speaker 9: you look at what's going on among Japanese investors. They're
Speaker 9: facing the realities of a tough currency compare and really
Speaker 9: tough hedging costs in terms of their ability to buy
Speaker 9: treasuries in the size that they have been buying really
Speaker 9: over the last decade. The geopolitical dimensions of this, you know, historically,
Speaker 9: we know China has has been a big buyer given
Speaker 9: their you know, trade balances and foreign currency reserves and
Speaker 9: US dollars. Uh, there's a lot of complexity UH, and
Speaker 9: a lot I believe to question about why we haven't
Speaker 9: seen that flight to safety UH manifest as it historically
Speaker 9: has in US treasuries. I do think that this is
Speaker 9: something we need to watch and study and really think
Speaker 9: hard about about whether or not something is changing and
Speaker 9: whether the US treasury market is vulnerable to geopolitics for
Speaker 9: the first time, maybe since World War Two.
Speaker 2: Lisa Chalatte Morgan Stanley Wealth mentioned it is clear cut
Speaker 2: that when people are spending on clothes, Amazon does well.
Speaker 2: But that seems to be what we experienced yesterday in
Speaker 2: the Earth, straining us now to really pass through it.
Speaker 2: Anor A Karana and Punam Goyle of Bloomberg Intelligence covering
Speaker 2: the tech and the retail side of things. Anag, I
Speaker 2: want to start with you, are we basically just learning
Speaker 2: that Microsoft is taking the lead when it comes to
Speaker 2: cloud computing and Amazon and Google are falling behind.
Speaker 10: See I'm a big fan about Microsoft's down over the years,
Speaker 10: but I would not say that they are leading here.
Speaker 10: I would just say that in the Genai, you know, Frenzy,
Speaker 10: they just have a leg up because of their relationship
Speaker 10: with open Ai. But Amazon is still the biggest cloud
Speaker 10: out there. They have more, yeah, I would say revenue
Speaker 10: than anybody else. That's partially the reason why their relative
Speaker 10: growth rates are not as strong. But last night's comments
Speaker 10: on the conference call were so positive and I think
Speaker 10: that's what's driving the stock up here. Before that, the
Speaker 10: stock was flat, and you know, it was just the
Speaker 10: positive I would say body language of the management team
Speaker 10: that you know, the cloud bottom may be here for them.
Speaker 3: Okay, who's got the strongest who has the strongest cloud offering,
Speaker 3: and who will win the most market share?
Speaker 10: Well, Amazon's far bigger in terms of you know, revenue,
Speaker 10: the revenue boundard is closer to ninety billion dollars compared
Speaker 10: to Microsoft, which is closer to sixty billion, and with
Speaker 10: Google somewhere around twenty four to twenty five billion. So
Speaker 10: Amazon's clearly the leader with the biggest network and biggest footprint.
Speaker 3: But let's bring you into the conversation here. This has
Speaker 3: been a brutal week. At one junction, we lost two
Speaker 3: hundred billion dollars in market cap of some of these
Speaker 3: biggest and most loved, most owned stocks in the US.
Speaker 3: As you go to the close of the week, there
Speaker 3: was a brutalization of stocks that disappointed on Clyde, But
Speaker 3: the one thing that stood out to me is that
Speaker 3: there are these tech companies and they are raising prices.
Speaker 3: How does that play into your thinking?
Speaker 1: Yeah, I think on.
Speaker 11: The retail side, Amazon actually has done a great job
Speaker 11: in maintaining its share and even growing it. You know,
Speaker 11: when you talk about raising crisis, do then in flee.
Speaker 11: I think it's quite the opposite at Amazon. You're actually
Speaker 11: seeing them push forward low crisis, especially on those deal
Speaker 11: days that they have, like Prime Days, and that's driving
Speaker 11: the consumer spend. We're expecting Amazon to use it scale
Speaker 11: and speed to really push the pedal on prices even
Speaker 11: more as we go through the holiday season, and that's
Speaker 11: going to drive consumers to their platform, allowing them to
Speaker 11: go gain share over competitors.
Speaker 12: Plunum advertising revenue has been growing at a double digit
Speaker 12: clip based on what two hundred million global Prime subscribers
Speaker 12: were able to get an early WED on that Prime
Speaker 12: Video ads edition.
Speaker 11: I think the ad edition is going to take time
Speaker 11: to build right now. The bulk of that advertising revenue
Speaker 11: is driven from the retail side, and I think that's
Speaker 11: really key here that's going to continue to climb. And
Speaker 11: remember that advertising is a much more profitable business than
Speaker 11: the retail business and even the cloud business. So as
Speaker 11: that business scales beyond fifty billion, which it's trending to
Speaker 11: right now, it's going to drive the bottom line for Amazon.
Speaker 11: And that edition of the ads that you're talking about,
Speaker 11: I think that's just icing on the cake.
Speaker 9: I mean, that's really going.
Speaker 11: To also help build revenues for Amazon and allow customers
Speaker 11: to choose do they want the ads or do they
Speaker 11: want the content without the ads where they would have to.
Speaker 13: Pay attlefore that.
Speaker 12: And you're right, we've now digested earnings from Alphabet, Meta, Intel, IBM,
Speaker 12: you name it. You know, what are the primary takeaways
Speaker 12: from you from three third quarter performance?
Speaker 10: I think if we are not very close to the bottom,
Speaker 10: you know, we have probably a quarter or two away,
Speaker 10: and I think that really sets up well for a
Speaker 10: big rebound in twenty twenty four. And I think this
Speaker 10: was the biggest fear that we have that what's going
Speaker 10: to happen beginning of next year with geopolitical conditions getting worse.
Speaker 10: And I think last night's results and even Microsoft's comments
Speaker 10: give us some hope that things are not as bad
Speaker 10: as you know, you know, people are making out to be.
Speaker 2: It does raise a question though, about the differentiation on
Speaker 2: rog within the cloud space, within the AI space, and
Speaker 2: whether companies are being reward for investing in some of
Speaker 2: the AI intelligence AI programming that could make a lot
Speaker 2: of money. Did you get the sense that Amazon was
Speaker 2: rewarded more on that front than Google.
Speaker 10: See. One of the biggest thing I think it's the
Speaker 10: scale matters now, And you have to remember most enterprises
Speaker 10: around the world fortune two thousand companies are going to
Speaker 10: experiment with this technology over the next twelve to twenty
Speaker 10: four months. Who are they going to go to. All
Speaker 10: these companies have the building blocks for people to experiment,
Speaker 10: So I'm not saying one's going to win over the other.
Speaker 10: All three of them are going to get their fair
Speaker 10: share of revenue from the clients. The problem is on
Speaker 10: the other side, they actually don't have enough GPU capacity
Speaker 10: to go out and build some of that AI workloads
Speaker 10: or training models and other things. But I'm fairly confident
Speaker 10: that over the next twelve for twenty four months, all
Speaker 10: three of them are going to see some benefit from Jenai.
Speaker 3: Who's got the ability to deliver the best margins. You
Speaker 3: note that revenue grew by twelve percent of aws, but the
Speaker 3: margin jump by third thirty percent. Who else is at
Speaker 3: thirty percent or beating that? Or is that where the
Speaker 3: aspiration is to deliver stronger margins?
Speaker 5: Is that part of the buy thesis.
Speaker 10: So one of the things we have talked about, think
Speaker 10: about all the three companies in the long run. Now
Speaker 10: the long run could be five years.
Speaker 13: Or ten years.
Speaker 10: These businesses have potential to grow operating margins north of
Speaker 10: forty percent. Now that's the reason why we say that
Speaker 10: is if you look at you know, processing companies and
Speaker 10: other things, when they reach maturity stage, these are highly
Speaker 10: scalable business Once you you know, go through the cycle
Speaker 10: of capax, you don't really require that much money to
Speaker 10: maintain them. We are confident in the long run all three
Speaker 10: of them.
Speaker 13: Will have great margins.
Speaker 10: The other two companies don't really disclose it at the
Speaker 10: cloud level, at that infrastructure level, but to that extent,
Speaker 10: I mean, I mean, frankly, alphabet is still losing money
Speaker 10: in their cloud portfolio. But there is a lot of
Speaker 10: different things that go into that.
Speaker 2: Put on what's the takeaway that we've gotten in terms
Speaker 2: of these earnings about how much retailers in the US
Speaker 2: continue their hedonistic tendencies.
Speaker 13: Yeah, I thank you for the retailers.
Speaker 11: It's going to be mixed. As we moved through holiday,
Speaker 11: there is going to be clear winners and losers. And
Speaker 11: we do think that the consumer is really focused on
Speaker 11: value and that trend isn't going away for the holiday season,
Speaker 11: so they're going to have to suction the pedal on
Speaker 11: price and inventories aren't as high as they were last year,
Speaker 11: so it's really going to depend on their ability to
Speaker 11: bring product in to drive demand and really keep prices
Speaker 11: well the holiday season.
Speaker 2: Un I'm Gail on our grounda both of you. Thank
Speaker 2: you so much for being with us. One aspect of
Speaker 2: the market that's kind of flown under the radar is
Speaker 2: the regional banks in particular, especially as we talk about
Speaker 2: the big banks and the successors and all of that,
Speaker 2: and we could see that so far you're to date
Speaker 2: the BKX, the KBX KBW index is down twenty five percent,
Speaker 2: close to the lows that we saw during the crisis
Speaker 2: back in March. Now is Chris Marinac, director of research
Speaker 2: at Jenny Montgomery Scott. And I know Chris that you've
Speaker 2: been really bullish on the banking sector and I want
Speaker 2: to get your take on what you make of the
Speaker 2: selloff that has persisted.
Speaker 11: Well.
Speaker 14: I think, Lisa, there's been some continued struggles about the
Speaker 14: fears of credit quality getting worse in twenty twenty four.
Speaker 14: I think that there's been some passive flows against the banks.
Speaker 14: I've heard of a lot of folks shorting the KRX
Speaker 14: and the KRE and then going along in the Nasdaq
Speaker 14: one hundred, So that has been a challenge in terms
Speaker 14: of incremental selling. I think to some extent, the banks
Speaker 14: are not sexy here and they're not doing anything from
Speaker 14: a growth perspective that causes investors to dive in. And
Speaker 14: I think most of the fun flows has been to
Speaker 14: other growth areas and other areas that are kind of
Speaker 14: avoiding anything that's economically sensitive and perhaps recession recession.
Speaker 2: proNT So have you gotten less bullish on this area
Speaker 2: because we have seen a bit of underperformance versus expectations,
Speaker 2: particularly in the regional space, and there isn't a clear
Speaker 2: pathway to growth.
Speaker 14: Well, the stocks have an opportunity to trade back to
Speaker 14: forty five to forty seven on the KRE. I think
Speaker 14: the question is can we get investors to pay attention
Speaker 14: to what really.
Speaker 13: Matters, which is cash flow. The operating cash.
Speaker 14: Flow for most banks is only down about ten percent
Speaker 14: from the August estimate's pre third quarter earnings, and so
Speaker 14: I think the other ninety percent of PP and R
Speaker 14: is actually very strong to allow banks to earn through
Speaker 14: the cycle on credit issues and anything.
Speaker 13: That comes their way.
Speaker 14: I think their capacity to absorb losses is extremely good,
Speaker 14: and that's one of the reasons I've thought the stocks
Speaker 14: have opportunities.
Speaker 13: To do better.
Speaker 14: I don't think we'll go back to where we would
Speaker 14: have been on the KRE pre Silicon valley, but I
Speaker 14: do think we can be better than we are, and
Speaker 14: I think we have to get through this recession discounting
Speaker 14: that the market is doing.
Speaker 13: At the moment.
Speaker 3: Yeah, we are pretty obsessed with the recession dis kind
Speaker 3: in it just hasn't come home Durus yet, Chris good Morning.
Speaker 3: Provisioning was something that stood out for me as being
Speaker 3: on the low side in this reporting season.
Speaker 5: Of course, if there is no dramatic.
Speaker 3: Slow dying and there is no hard landing, then that's
Speaker 3: all justified that The acinting reason, do you think twenty
Speaker 3: twenty four is going to be madred by an increase
Speaker 3: a material increase in provisioning, and if so, word does
Speaker 3: it hurt the most.
Speaker 14: So I think that the provisions will rise in twenty
Speaker 14: four primarily because I think charge offs will go up.
Speaker 14: We have a lot of companies who are writing off
Speaker 14: fifteen to twenty basis points of charge offs, which is
Speaker 14: very very low. So going back to thirty or forty
Speaker 14: basis points for most mid sized banks is normal. I
Speaker 14: think your large national companies probably right off between forty
Speaker 14: five and fifty, so that's a little higher than the
Speaker 14: forty range that they are today, So that will cause
Speaker 14: provision to rise. I think generally most banks are going
Speaker 14: to set aside reserves to kind of build confidence with themselves. Clearly,
Speaker 14: the accounting on SECOIL has led banks to actually limit
Speaker 14: their reserve growth.
Speaker 13: This quarter, less than I would have fought.
Speaker 14: I think to some extent it is driven by unlimited
Speaker 14: balance sheet growth and also the Moody's forecast that a
Speaker 14: lot of banks use has actually pushed out the recession,
Speaker 14: and that is also tamped down the reserve calculations.
Speaker 3: I mean, you think the consensus is obviously JP Morgan
Speaker 3: just keeps getting bigger. It's just like this juggernaut that
Speaker 3: just swallows everything and moves everything out of its way.
Speaker 3: You've listened to the conference calls, You've listened to a
Speaker 3: couple of these CEOs. Who's under most pressure in the
Speaker 3: banking sphere? I know I have my target list, But
Speaker 3: who do you think is under the most pressure as
Speaker 3: the CEO at the moment?
Speaker 14: Well, I think there are regional banks who have capital
Speaker 14: ratios that are depressed when you take the mark to
Speaker 14: market for all securities, both for the available for sale
Speaker 14: and held the maturity, So that issue has to be resolved.
Speaker 14: I think to some extent, banks will work out of
Speaker 14: their issues on their own because securities are going to
Speaker 14: start maturing in four and twenty five and to some
Speaker 14: extent these marks start to flatten out. We don't have
Speaker 14: to see FED policy chains for the marks to get better.
Speaker 14: I think somebody think that some of the payoffs of
Speaker 14: securities coming due at maturity will help. I think the
Speaker 14: pressure is on the regional banks who are going to
Speaker 14: have these new FED accounting rules, which basically means who
Speaker 14: ratios are lower than they're reported, And even though it's
Speaker 14: phased in over a three year period, the market just
Speaker 14: perceives that they have to adopt those capital rules today,
Speaker 14: so to some extent, I think we have to fight
Speaker 14: through that. The good news is the banks are profitable,
Speaker 14: they can pay dividends. There's no changes happening on some
Speaker 14: of those major items like common and preferred dividends. So
Speaker 14: I think the attitude for the investors should be better
Speaker 14: than it is. But I think the pressure is really
Speaker 14: on the regional banks where the definition is.
Speaker 13: Changing on capital.
Speaker 14: I do think will work through it, but that continues
Speaker 14: to be the pressure point.
Speaker 13: At the moment.
Speaker 8: So does that mean that we have to extend the
Speaker 8: BTFP and do you believe that they will extend that we.
Speaker 13: Don't have to extend it.
Speaker 14: It would be nice to extend because it simply takes
Speaker 14: one issue off the table.
Speaker 13: The use of BTFP has been very limited.
Speaker 14: It's hovering around one hundred and nine billion for weeks
Speaker 14: and weeks, and so the banks who have used it
Speaker 14: have used it. Some may renew if given the opportunity,
Speaker 14: but if they don't, I don't think it's a big problem.
Speaker 13: It would be nice to do that.
Speaker 14: It would be nice to have some FDIC deposit insurance
Speaker 14: reform to be able to buy insurance on uninsured depositors.
Speaker 14: I'm not sure the FDIC is going to go there,
Speaker 14: so that would be my thought on that.
Speaker 8: So it sounds like the regional banks have a maturity
Speaker 8: profile that's not as dire as I think some of
Speaker 8: us were worried about. But I think about some of
Speaker 8: the assets that are sitting there. Are the regional banks
Speaker 8: kind of stuck like utilities where I'm in a flat
Speaker 8: yield curve, so I don't have a lot going on there.
Speaker 8: I have some things I may have to write off,
Speaker 8: but I just don't see a lot of growth ahead
Speaker 8: of me. And they don't have the diversification of some
Speaker 8: of the money center banks.
Speaker 13: Well, I actually think the diverse location is actually very good.
Speaker 14: I mean, you have office real estates very limited, even
Speaker 14: commercial real estates very limited. Within the C and I space,
Speaker 14: there's a lot of different mid size and small businesses
Speaker 14: that regional banks and even community banks do and provide
Speaker 14: a great service for that. The economy is healthier than
Speaker 14: I think folks realize. But even if it changes, the
Speaker 14: ability for companies to earn through is very good. What
Speaker 14: we see happening is actually less balance sheet growth but
Speaker 14: more turnover old loans that are at low yields, renewing
Speaker 14: at high yields.
Speaker 13: A new loan today is going on the books at
Speaker 13: eight percent, and.
Speaker 14: That actually is very attractive, and it's going to cosset
Speaker 14: the mix to shift on netatrist margin. We think margins
Speaker 14: may actually bottom in the first quarter, if not sooner,
Speaker 14: and that will help the stocks.
Speaker 13: I think catch a little bit of a bid.
Speaker 2: Chris, just real quick here, final word on Ted Pick
Speaker 2: the idea of some of the succession at Morgan Stanley.
Speaker 2: Is it significant in terms of the direction of that
Speaker 2: bank or do you think that it's basically going to
Speaker 2: be a continuing of the guard.
Speaker 14: Well, the investment banking business is the highest margin business
Speaker 14: of these large international firms, so it didn't surprise me
Speaker 14: at all that he was the choice. I think that
Speaker 14: his leadership inside the company has been very well thought
Speaker 14: of for a long time, so it seemed to make sense.
Speaker 14: I think to some extent they want to put the
Speaker 14: best foot forward, not to be negative on the wealth
Speaker 14: management space, because it's certainly a huge driver. They picked
Speaker 14: up a lot of new customers from the First Republic
Speaker 14: failure in April and May, so there's a lot happening there.
Speaker 14: But it seemed to be kind of continuing on the
Speaker 14: investment banking Angela.
Speaker 2: Chris Marrinac of Jenny Montgomery Scott. Thank you so much.
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