WEBVTT - Apollo Management Chief Economist Torsten Slok Talks 2024 Fed Rates

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news joining us right now.

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<v Speaker 2>Turston slock a polyglobal management, hugely read on Wall Street.

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<v Speaker 2>Of course, off of is a kind of work at

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<v Speaker 2>Deutsche Bank is well, Turston. Twelve months forward, where's real GDP?

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<v Speaker 1>I still think it's strong.

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<v Speaker 3>But I do think that the weather report you just

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<v Speaker 3>had with still mildly hot economy, mildly hot weather, but

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<v Speaker 3>with a risk that we may have some slow down

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<v Speaker 3>coming maybe twelve months, but more eighteen months into the future.

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<v Speaker 1>The fear you can have is that.

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<v Speaker 3>Higher for longer ultimately begins to bite harder on LeVert

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<v Speaker 3>balance sheets for consumers, on LeVert balance sheets for firms,

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<v Speaker 3>and LeVert balance sheets in the banking sector, and that

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<v Speaker 3>could potentially create that dreaded recession that we've.

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<v Speaker 1>Been worrying about for so long.

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<v Speaker 3>But so far, for the next several quarters, we still

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<v Speaker 3>think that the tailwinds to growth are very strong from

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<v Speaker 3>fiscal policy and from easy financial conditions.

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<v Speaker 4>I'm pretty consistent here in your call that this Federal

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<v Speaker 4>Reserve doesn't really have to cut rates in twenty twenty four.

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<v Speaker 4>Do you still believe that, and if so, why?

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<v Speaker 3>I still believe that because of what I think. I mean,

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<v Speaker 3>the first test is, well, if we literally just a

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<v Speaker 3>quote unquote look out of the window and see how

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<v Speaker 3>are things going in the incoming data. Non farm payrolls

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<v Speaker 3>at two hundred and seventy two thousand, that's a really

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<v Speaker 3>strong number. There's some debate about whether some of that

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<v Speaker 3>maybe is driven higher because of immigration, when the Edelburgh

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<v Speaker 3>and Tara Watson at the Brookings Institute wrote a very

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<v Speaker 3>important paper suggesting that maybe the equilibrium growth in non

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<v Speaker 3>farm payrolls is about one hundred thousand higher than normal

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<v Speaker 3>because of immigration. But I still think that strength in

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<v Speaker 3>the numbers across the board, with a little bit of

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<v Speaker 3>weakness may be in retail sales earlier this week, but

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<v Speaker 3>at the same day we also had industrial production was

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<v Speaker 3>very strong, so jobless claims also looking good. It's just

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<v Speaker 3>hard to see where that slowdown is that so many

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<v Speaker 3>people are worried about. So because of that, we just

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<v Speaker 3>don't see the urgency for the FED having some cut rates.

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<v Speaker 4>Are you surprised is that the higher rates haven't impacted

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<v Speaker 4>the consumer more. I mean, it's it's tough to get

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<v Speaker 4>a plane seat, it's tough to get a seat on

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<v Speaker 4>a cruise ship. It's tough to get a seat at

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<v Speaker 4>a restaurant. Talk to just about how the consumers reacting.

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<v Speaker 3>Yeah, this is very important Pole, So I think it's

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<v Speaker 3>very critical in that discussion is that the transmission mechanism

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<v Speaker 3>of mortary policy was actually working last year, exactly as

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<v Speaker 3>the textbook would have predicted. The FED raise rates in

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<v Speaker 3>March of twenty twenty two, and the most highly leveled

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<v Speaker 3>consumers started responding because you saw the languagey rates go

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<v Speaker 3>up on credit cards, the languagey rate go about auto loans,

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<v Speaker 3>especially for consumers that have more debt, which generally are

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<v Speaker 3>consumers that are younger also and consumers that have lower

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<v Speaker 3>five coats goes same thing for corporates. You began to

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<v Speaker 3>see the full rates go up for high yield, the

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<v Speaker 3>full rates go up for loans. So, in other words,

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<v Speaker 3>balance sheets that had a lot of debt were first

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<v Speaker 3>hit by the FED racing rates. But what really is

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<v Speaker 3>unique at the moment, that is the answer to your question, Paul,

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<v Speaker 3>is that for consumers, they have locked in during the pandemic,

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<v Speaker 3>mortgage rate, as we all know, ninety five percent are

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<v Speaker 3>thirty five fixed at.

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<v Speaker 1>Very low levels.

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<v Speaker 3>Likewise, for corporates, the vast majority of credit markets is

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<v Speaker 3>I G and IT companies locked in and turned out

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<v Speaker 3>also very low interest rates. And as a result of that,

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<v Speaker 3>the transmission making has just been weaker than what it

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<v Speaker 3>normally is. And that changed with a FED pivoting to

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<v Speaker 3>dubbish because then on top of that, not only was

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<v Speaker 3>the transmission making week, but we also got a tailwind

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<v Speaker 3>from easy financial conditions with S and p up as

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<v Speaker 3>much as we have seen.

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<v Speaker 2>Tursan, You've led on this and it's your best chart

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<v Speaker 2>of the many charts you put out ten years ago. Folks,

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<v Speaker 2>the share of mortgages below four percent, Paul was thirty percent.

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<v Speaker 2>Is it for the conversations doubled? I mean, I mean

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<v Speaker 2>the number of mortgages below four percent is doubled in

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<v Speaker 2>ten eleven years. And touristen, that goes directly into the

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<v Speaker 2>transmission mechanism. You know, I'm very negative on the dots.

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<v Speaker 2>Do the dots of the FED have they adjusted to

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<v Speaker 2>the slock slower transmission mechanism?

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<v Speaker 3>Well, I do think what is very important in the

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<v Speaker 3>last if I'm seeing meeting, and you have also talked

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<v Speaker 3>about that on a surveillance radio, because what we saw

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<v Speaker 3>was of course, that the FED went from instead saying

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<v Speaker 3>three cuts in twenty twenty four to now saying one cut.

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<v Speaker 3>That on its own is an admission that we were.

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<v Speaker 1>Wrong at the FED. We thought that we would have

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<v Speaker 1>three cuts. Now we think we'll to have one cut.

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<v Speaker 3>So in some sense the FED is coming quote unquote

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<v Speaker 3>back to the view that maybe there is no strong

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<v Speaker 3>arguments for being in this urgent rag pace having two

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<v Speaker 3>cut rates as quickly as they thought just six months ago.

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<v Speaker 2>Were thrilled you with us for the entire half our

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<v Speaker 2>tourist and slock. You know, we're gonna go to go

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<v Speaker 2>to Michael barn News, but I'm gonna really come up

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<v Speaker 2>on beating this folks. I haven't mentioned this on area yet,

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<v Speaker 2>but it's a symptotic twenty twenty four.

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<v Speaker 1>What is he talking about?

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<v Speaker 2>Come on, tourston all the assim Tote discussion. Ethan Harris

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<v Speaker 2>retired from Bank of America leading the charge on as

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<v Speaker 2>a few others as well. They're lost and they're extending

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<v Speaker 2>out the axis as far as they can. It's that simple, right.

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<v Speaker 1>I agree.

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<v Speaker 3>I think that what is very important here is that

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<v Speaker 3>we have unleashed some fairly significant powers with inflation going up.

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<v Speaker 3>And one point that's also very critical in this discussion

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<v Speaker 3>is that if you look at Michigan five to tenure

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<v Speaker 3>inflation long term inspectations.

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<v Speaker 1>The median is still very well behaved. So the median

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<v Speaker 1>household still.

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<v Speaker 3>Thinks inflation will be three point one, which is where

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<v Speaker 3>it's been for the last several years. But if you

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<v Speaker 3>look at the mean, you will see a significant increase

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<v Speaker 3>in one half of the population expecting that inflation is

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<v Speaker 3>going to be dramatically higher than the other half. And

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<v Speaker 3>if you look at the sub questions in the Unversity

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<v Speaker 3>of Michigan, who is it that's expecting inflation to be higher,

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<v Speaker 3>It is, generally speaking, the bottom thirty three percent of

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<v Speaker 3>household incomes, meaning low income households expect much higher inflation

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<v Speaker 3>than high income households. And it's general also people with

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<v Speaker 3>high school or less education that expects inflation to be

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<v Speaker 3>a lot higher. So you're beginning to see some divergence

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<v Speaker 3>in inflation expectations. And this is opening up a very

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<v Speaker 3>important debate in the Phillips curve that you and I,

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<v Speaker 3>Tom and I talked about for years, where if inflation

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<v Speaker 3>expectations for half of the population are very very high.

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<v Speaker 3>What does that mean for when the fit say is

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<v Speaker 3>that inflation expectations are under control.

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<v Speaker 1>Yes, the media may be under control, but.

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<v Speaker 3>There's a significant part of the population they're still worry

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<v Speaker 3>about inflation.

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<v Speaker 4>To us and talk to us about what concern do

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<v Speaker 4>you have about this? Maybe the commercial real estate market

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<v Speaker 4>in this country it feels like it's there's still a

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<v Speaker 4>big shoe or two or three to drop, but maybe not.

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<v Speaker 4>How do you think about that risk here as we

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<v Speaker 4>look around to some of these big cities and see

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<v Speaker 4>a lot of vacant office space.

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<v Speaker 3>I think the important data point first to keep in

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<v Speaker 3>mind is that the price per square foot for office

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<v Speaker 3>nationwide is down more than forty percent from the peak.

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<v Speaker 3>So if we think about what that means, that of

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<v Speaker 3>course means that there's a lot of office that has

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<v Speaker 3>been reset at a lower level. Now, there's some important

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<v Speaker 3>differences across the country, of course, with the Sun Belt,

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<v Speaker 3>with the West Coast relative to East Coast, relative to

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<v Speaker 3>metropolitan areas, but the bottom line is really that, well,

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<v Speaker 3>when an asset price goes down more than forty percent,

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<v Speaker 3>and in particularly when the financing of that asset price

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<v Speaker 3>is something that normally is reset every five years. Then

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<v Speaker 3>we still have a maturity wall in commercial estate, in

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<v Speaker 3>particularly in office that is really really steep. For other

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<v Speaker 3>types of commercial real estate things look a lot better.

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<v Speaker 3>So of course you have warehouses, industrial, you have apartments, multifamily,

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<v Speaker 3>shopping malls. Of course, also have data centers. There's some

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<v Speaker 3>very idiosyncratic stories across the different types of commercial real estate.

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<v Speaker 3>But the main issue still that we should all be

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<v Speaker 3>watching is office because that is just still where most

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<v Speaker 3>of the downward drift is.

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<v Speaker 4>Towards another economic issue that's really been or I guess

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<v Speaker 4>this discussion point over the last eighteen months as we

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<v Speaker 4>look around the world as this concept of American exceptionalism

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<v Speaker 4>from an economic perspective, you know, the commercial rule state

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<v Speaker 4>issue notwithstanding, how real is that the US economy strength

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<v Speaker 4>visa to be the rest of the world, or how

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<v Speaker 4>do you explain that?

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<v Speaker 1>Yeah, this is really important.

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<v Speaker 3>So there is a structural discussion exactly about is the

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<v Speaker 3>US exceptional and the US it's closed. It is exceptional

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<v Speaker 3>because of large capital markets, much more spending and broadly

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<v Speaker 3>speaking across the board in occluding on defense, including also

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<v Speaker 3>on the role of the US consumer. So simply because

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<v Speaker 3>the US as the biggest economy in the world, playing

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<v Speaker 3>this very sot it does, generally speaking, attract capital.

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<v Speaker 1>On top of that comes the most cygnical.

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<v Speaker 3>Arguments, namely that the US business cycle just happens to

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<v Speaker 3>be a lot stronger than the business cycle in Europe,

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<v Speaker 3>the business cycle in Japan, Canada, Australia, emerging markets, and

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<v Speaker 3>of course also China.

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<v Speaker 1>And when the US is stronger, then that.

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<v Speaker 3>Means, of course, as we're seeing and as we're talking about,

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<v Speaker 3>then brakes will be higher for longer in the US

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<v Speaker 3>than elsewhere. That's, of course what we saw with easy

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<v Speaker 3>b cutting rates they being ends today is staying at hold,

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<v Speaker 3>but now signaling clearly the rake cuts are coming. All

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<v Speaker 3>that argues for still more upward pressure on the dollar

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<v Speaker 3>because the US is exceptional not only from a structural perspective,

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<v Speaker 3>but also at the moment exceptional from a cyclical perspective.

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<v Speaker 3>So with that background, when will that exceptionalism from the

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<v Speaker 3>cyclical perspective change?

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<v Speaker 1>When the FED begins to cut rates, then.

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<v Speaker 3>We could begin to see the dollar begin to turn

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<v Speaker 3>really south in a most more substantial way. But given

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<v Speaker 3>that's still now being pushed out repeatedly, then I still

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<v Speaker 3>think the dollar will be going up, and the exceptionalism

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<v Speaker 3>does play a very important role, both on the structural

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<v Speaker 3>side and on the cyclical side.

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<v Speaker 2>Turst then one more question. We've got to go to

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<v Speaker 2>breaking news. But I think this is too too important.

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<v Speaker 2>Back to the idea of an xxis that goes out

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<v Speaker 2>forever in the new idea percolating of an assm tote,

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<v Speaker 2>I guess down to two percent. Is the assump tote

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<v Speaker 2>a smooth glide path down to two percent out there

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<v Speaker 2>somewhere or is it two point x percent?

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<v Speaker 3>So if you mean inflation, of course, then the issue

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<v Speaker 3>is that inflation at the moment, as you know, is

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<v Speaker 3>three point three. The FEDS target is that it should

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<v Speaker 3>be two. Three point three is not two. So that's

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<v Speaker 3>why if I'm seeing members repeatedly talk about, well, maybe

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<v Speaker 3>we do need to wait a little while longer before

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<v Speaker 3>we start cutting rates.

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<v Speaker 1>And to your question, will we.

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<v Speaker 3>Have an asymptotic moved down from three point three to

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<v Speaker 3>two point zero? I think that the answer to that

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<v Speaker 3>is absolutely not. We still have significant tailwinds from fiscal policy,

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<v Speaker 3>the Chips Act, the Inflation Reduction Infrastructure and in all

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<v Speaker 3>policies that designed to lift growth over the next several years. Likewise,

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<v Speaker 3>we have a very strong tailwind from easy financial conditions.

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<v Speaker 3>As long as the AI story and the stock market

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<v Speaker 3>goes up, we still will have like we saw this

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<v Speaker 3>early season, strong demand for airlines, hotels, restaurants, concert sporting events.

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<v Speaker 3>So the short answer to your question is I worry

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<v Speaker 3>that inflation is not going to come down in a

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<v Speaker 3>straight line to two percent from the three point three

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<v Speaker 3>percent where we are today.

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<v Speaker 2>Tristin Sluk, thank you so much. It's with Apollo