Speaker 1: Bloomberg Audio Studios, podcasts, radio news joining us right now.
Speaker 2: Turston slock a polyglobal management, hugely read on Wall Street.
Speaker 2: Of course, off of is a kind of work at
Speaker 2: Deutsche Bank is well, Turston. Twelve months forward, where's real GDP?
Speaker 1: I still think it's strong.
Speaker 3: But I do think that the weather report you just
Speaker 3: had with still mildly hot economy, mildly hot weather, but
Speaker 3: with a risk that we may have some slow down
Speaker 3: coming maybe twelve months, but more eighteen months into the future.
Speaker 1: The fear you can have is that.
Speaker 3: Higher for longer ultimately begins to bite harder on LeVert
Speaker 3: balance sheets for consumers, on LeVert balance sheets for firms,
Speaker 3: and LeVert balance sheets in the banking sector, and that
Speaker 3: could potentially create that dreaded recession that we've.
Speaker 1: Been worrying about for so long.
Speaker 3: But so far, for the next several quarters, we still
Speaker 3: think that the tailwinds to growth are very strong from
Speaker 3: fiscal policy and from easy financial conditions.
Speaker 4: I'm pretty consistent here in your call that this Federal
Speaker 4: Reserve doesn't really have to cut rates in twenty twenty four.
Speaker 4: Do you still believe that, and if so, why?
Speaker 3: I still believe that because of what I think. I mean,
Speaker 3: the first test is, well, if we literally just a
Speaker 3: quote unquote look out of the window and see how
Speaker 3: are things going in the incoming data. Non farm payrolls
Speaker 3: at two hundred and seventy two thousand, that's a really
Speaker 3: strong number. There's some debate about whether some of that
Speaker 3: maybe is driven higher because of immigration, when the Edelburgh
Speaker 3: and Tara Watson at the Brookings Institute wrote a very
Speaker 3: important paper suggesting that maybe the equilibrium growth in non
Speaker 3: farm payrolls is about one hundred thousand higher than normal
Speaker 3: because of immigration. But I still think that strength in
Speaker 3: the numbers across the board, with a little bit of
Speaker 3: weakness may be in retail sales earlier this week, but
Speaker 3: at the same day we also had industrial production was
Speaker 3: very strong, so jobless claims also looking good. It's just
Speaker 3: hard to see where that slowdown is that so many
Speaker 3: people are worried about. So because of that, we just
Speaker 3: don't see the urgency for the FED having some cut rates.
Speaker 4: Are you surprised is that the higher rates haven't impacted
Speaker 4: the consumer more. I mean, it's it's tough to get
Speaker 4: a plane seat, it's tough to get a seat on
Speaker 4: a cruise ship. It's tough to get a seat at
Speaker 4: a restaurant. Talk to just about how the consumers reacting.
Speaker 3: Yeah, this is very important Pole, So I think it's
Speaker 3: very critical in that discussion is that the transmission mechanism
Speaker 3: of mortary policy was actually working last year, exactly as
Speaker 3: the textbook would have predicted. The FED raise rates in
Speaker 3: March of twenty twenty two, and the most highly leveled
Speaker 3: consumers started responding because you saw the languagey rates go
Speaker 3: up on credit cards, the languagey rate go about auto loans,
Speaker 3: especially for consumers that have more debt, which generally are
Speaker 3: consumers that are younger also and consumers that have lower
Speaker 3: five coats goes same thing for corporates. You began to
Speaker 3: see the full rates go up for high yield, the
Speaker 3: full rates go up for loans. So, in other words,
Speaker 3: balance sheets that had a lot of debt were first
Speaker 3: hit by the FED racing rates. But what really is
Speaker 3: unique at the moment, that is the answer to your question, Paul,
Speaker 3: is that for consumers, they have locked in during the pandemic,
Speaker 3: mortgage rate, as we all know, ninety five percent are
Speaker 3: thirty five fixed at.
Speaker 1: Very low levels.
Speaker 3: Likewise, for corporates, the vast majority of credit markets is
Speaker 3: I G and IT companies locked in and turned out
Speaker 3: also very low interest rates. And as a result of that,
Speaker 3: the transmission making has just been weaker than what it
Speaker 3: normally is. And that changed with a FED pivoting to
Speaker 3: dubbish because then on top of that, not only was
Speaker 3: the transmission making week, but we also got a tailwind
Speaker 3: from easy financial conditions with S and p up as
Speaker 3: much as we have seen.
Speaker 2: Tursan, You've led on this and it's your best chart
Speaker 2: of the many charts you put out ten years ago. Folks,
Speaker 2: the share of mortgages below four percent, Paul was thirty percent.
Speaker 2: Is it for the conversations doubled? I mean, I mean
Speaker 2: the number of mortgages below four percent is doubled in
Speaker 2: ten eleven years. And touristen, that goes directly into the
Speaker 2: transmission mechanism. You know, I'm very negative on the dots.
Speaker 2: Do the dots of the FED have they adjusted to
Speaker 2: the slock slower transmission mechanism?
Speaker 3: Well, I do think what is very important in the
Speaker 3: last if I'm seeing meeting, and you have also talked
Speaker 3: about that on a surveillance radio, because what we saw
Speaker 3: was of course, that the FED went from instead saying
Speaker 3: three cuts in twenty twenty four to now saying one cut.
Speaker 3: That on its own is an admission that we were.
Speaker 1: Wrong at the FED. We thought that we would have
Speaker 1: three cuts. Now we think we'll to have one cut.
Speaker 3: So in some sense the FED is coming quote unquote
Speaker 3: back to the view that maybe there is no strong
Speaker 3: arguments for being in this urgent rag pace having two
Speaker 3: cut rates as quickly as they thought just six months ago.
Speaker 2: Were thrilled you with us for the entire half our
Speaker 2: tourist and slock. You know, we're gonna go to go
Speaker 2: to Michael barn News, but I'm gonna really come up
Speaker 2: on beating this folks. I haven't mentioned this on area yet,
Speaker 2: but it's a symptotic twenty twenty four.
Speaker 1: What is he talking about?
Speaker 2: Come on, tourston all the assim Tote discussion. Ethan Harris
Speaker 2: retired from Bank of America leading the charge on as
Speaker 2: a few others as well. They're lost and they're extending
Speaker 2: out the axis as far as they can. It's that simple, right.
Speaker 1: I agree.
Speaker 3: I think that what is very important here is that
Speaker 3: we have unleashed some fairly significant powers with inflation going up.
Speaker 3: And one point that's also very critical in this discussion
Speaker 3: is that if you look at Michigan five to tenure
Speaker 3: inflation long term inspectations.
Speaker 1: The median is still very well behaved. So the median
Speaker 1: household still.
Speaker 3: Thinks inflation will be three point one, which is where
Speaker 3: it's been for the last several years. But if you
Speaker 3: look at the mean, you will see a significant increase
Speaker 3: in one half of the population expecting that inflation is
Speaker 3: going to be dramatically higher than the other half. And
Speaker 3: if you look at the sub questions in the Unversity
Speaker 3: of Michigan, who is it that's expecting inflation to be higher,
Speaker 3: It is, generally speaking, the bottom thirty three percent of
Speaker 3: household incomes, meaning low income households expect much higher inflation
Speaker 3: than high income households. And it's general also people with
Speaker 3: high school or less education that expects inflation to be
Speaker 3: a lot higher. So you're beginning to see some divergence
Speaker 3: in inflation expectations. And this is opening up a very
Speaker 3: important debate in the Phillips curve that you and I,
Speaker 3: Tom and I talked about for years, where if inflation
Speaker 3: expectations for half of the population are very very high.
Speaker 3: What does that mean for when the fit say is
Speaker 3: that inflation expectations are under control.
Speaker 1: Yes, the media may be under control, but.
Speaker 3: There's a significant part of the population they're still worry
Speaker 3: about inflation.
Speaker 4: To us and talk to us about what concern do
Speaker 4: you have about this? Maybe the commercial real estate market
Speaker 4: in this country it feels like it's there's still a
Speaker 4: big shoe or two or three to drop, but maybe not.
Speaker 4: How do you think about that risk here as we
Speaker 4: look around to some of these big cities and see
Speaker 4: a lot of vacant office space.
Speaker 3: I think the important data point first to keep in
Speaker 3: mind is that the price per square foot for office
Speaker 3: nationwide is down more than forty percent from the peak.
Speaker 3: So if we think about what that means, that of
Speaker 3: course means that there's a lot of office that has
Speaker 3: been reset at a lower level. Now, there's some important
Speaker 3: differences across the country, of course, with the Sun Belt,
Speaker 3: with the West Coast relative to East Coast, relative to
Speaker 3: metropolitan areas, but the bottom line is really that, well,
Speaker 3: when an asset price goes down more than forty percent,
Speaker 3: and in particularly when the financing of that asset price
Speaker 3: is something that normally is reset every five years. Then
Speaker 3: we still have a maturity wall in commercial estate, in
Speaker 3: particularly in office that is really really steep. For other
Speaker 3: types of commercial real estate things look a lot better.
Speaker 3: So of course you have warehouses, industrial, you have apartments, multifamily,
Speaker 3: shopping malls. Of course, also have data centers. There's some
Speaker 3: very idiosyncratic stories across the different types of commercial real estate.
Speaker 3: But the main issue still that we should all be
Speaker 3: watching is office because that is just still where most
Speaker 3: of the downward drift is.
Speaker 4: Towards another economic issue that's really been or I guess
Speaker 4: this discussion point over the last eighteen months as we
Speaker 4: look around the world as this concept of American exceptionalism
Speaker 4: from an economic perspective, you know, the commercial rule state
Speaker 4: issue notwithstanding, how real is that the US economy strength
Speaker 4: visa to be the rest of the world, or how
Speaker 4: do you explain that?
Speaker 1: Yeah, this is really important.
Speaker 3: So there is a structural discussion exactly about is the
Speaker 3: US exceptional and the US it's closed. It is exceptional
Speaker 3: because of large capital markets, much more spending and broadly
Speaker 3: speaking across the board in occluding on defense, including also
Speaker 3: on the role of the US consumer. So simply because
Speaker 3: the US as the biggest economy in the world, playing
Speaker 3: this very sot it does, generally speaking, attract capital.
Speaker 1: On top of that comes the most cygnical.
Speaker 3: Arguments, namely that the US business cycle just happens to
Speaker 3: be a lot stronger than the business cycle in Europe,
Speaker 3: the business cycle in Japan, Canada, Australia, emerging markets, and
Speaker 3: of course also China.
Speaker 1: And when the US is stronger, then that.
Speaker 3: Means, of course, as we're seeing and as we're talking about,
Speaker 3: then brakes will be higher for longer in the US
Speaker 3: than elsewhere. That's, of course what we saw with easy
Speaker 3: b cutting rates they being ends today is staying at hold,
Speaker 3: but now signaling clearly the rake cuts are coming. All
Speaker 3: that argues for still more upward pressure on the dollar
Speaker 3: because the US is exceptional not only from a structural perspective,
Speaker 3: but also at the moment exceptional from a cyclical perspective.
Speaker 3: So with that background, when will that exceptionalism from the
Speaker 3: cyclical perspective change?
Speaker 1: When the FED begins to cut rates, then.
Speaker 3: We could begin to see the dollar begin to turn
Speaker 3: really south in a most more substantial way. But given
Speaker 3: that's still now being pushed out repeatedly, then I still
Speaker 3: think the dollar will be going up, and the exceptionalism
Speaker 3: does play a very important role, both on the structural
Speaker 3: side and on the cyclical side.
Speaker 2: Turst then one more question. We've got to go to
Speaker 2: breaking news. But I think this is too too important.
Speaker 2: Back to the idea of an xxis that goes out
Speaker 2: forever in the new idea percolating of an assm tote,
Speaker 2: I guess down to two percent. Is the assump tote
Speaker 2: a smooth glide path down to two percent out there
Speaker 2: somewhere or is it two point x percent?
Speaker 3: So if you mean inflation, of course, then the issue
Speaker 3: is that inflation at the moment, as you know, is
Speaker 3: three point three. The FEDS target is that it should
Speaker 3: be two. Three point three is not two. So that's
Speaker 3: why if I'm seeing members repeatedly talk about, well, maybe
Speaker 3: we do need to wait a little while longer before
Speaker 3: we start cutting rates.
Speaker 1: And to your question, will we.
Speaker 3: Have an asymptotic moved down from three point three to
Speaker 3: two point zero? I think that the answer to that
Speaker 3: is absolutely not. We still have significant tailwinds from fiscal policy,
Speaker 3: the Chips Act, the Inflation Reduction Infrastructure and in all
Speaker 3: policies that designed to lift growth over the next several years. Likewise,
Speaker 3: we have a very strong tailwind from easy financial conditions.
Speaker 3: As long as the AI story and the stock market
Speaker 3: goes up, we still will have like we saw this
Speaker 3: early season, strong demand for airlines, hotels, restaurants, concert sporting events.
Speaker 3: So the short answer to your question is I worry
Speaker 3: that inflation is not going to come down in a
Speaker 3: straight line to two percent from the three point three
Speaker 3: percent where we are today.
Speaker 2: Tristin Sluk, thank you so much. It's with Apollo